-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NIKs8khaThNJocentmR+1rcY6p8mguiz2h1HeXIKhM96/FP9f3ITh58XXJNLuNYr 8SOwjWaXIXBH72I/MJzgZQ== 0000950134-99-002266.txt : 19990402 0000950134-99-002266.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950134-99-002266 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROADCAST COM INC CENTRAL INDEX KEY: 0001061236 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 752600532 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24591 FILM NUMBER: 99579343 BUSINESS ADDRESS: STREET 1: 2914 TAYLOR STREET CITY: DALLAS STATE: TX ZIP: 75226 BUSINESS PHONE: 2147486660 MAIL ADDRESS: STREET 1: 2914 TAYLOR STREET CITY: DALLAS STATE: TX ZIP: 75226 10-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER: 000-24591 BROADCAST.COM INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2600532 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number)
2914 TAYLOR STREET, DALLAS, TEXAS 75226 (Address of principal executive offices, including zip code) (214) 748-6660 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 1999, the aggregate market value of the registrant's Common Stock held by nonaffiliates of the registrant was $1,603,830,196 based on the closing sales price of the registrant's Common Stock as reported on the Nasdaq National Market on such date. For purposes of this calculation, shares owned by officers, directors and 5% stockholders known to the registrant are deemed to be owned by affiliates. As of March 15, 1999, the number of shares of the registrant's Common Stock outstanding was 36,781,981, and the number of shares of the registrant's Preferred Stock outstanding was zero. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS INTRODUCTION Broadcast.com inc. (including its subsidiaries, "broadcast.com" or the "Company") is the leading aggregator and broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. The Company's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and full-length audio-books. The Company broadcasts on the Internet 24 hours a day seven days a week, and its programming includes more than 385 radio stations and networks, 40 television stations and cable networks, and game broadcasts and other programming for over 420 college and professional sports teams. The Company licenses such programming from content providers, in most cases under exclusive, multi-year agreements. The Company's Business Services Division provides cost-effective Internet and intranet broadcasting services to businesses and other organizations. These business services include the turnkey production of press conferences, earnings conference calls, investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning seminars, customized corporate TV channels and media events. The Company also derives revenues from the sale of advertising on its Web sites, including gateway ads with guaranteed click-thrus, channel and event sponsorships, and traditional banner ads. In December 1998, the Company's Web sites served a daily average of over 800,000 unique users, ranking the Company's sites #17 among all sites on the Internet according to Media Metrix. In July 1998, the Company completed its initial public offering, raising approximately $43.2 million (after expenses). During November 1998, the Company acquired Simple Network Communications, Inc. ("SimpleNet"), a premier provider of Web hosting services, to expand into Internet broadcasting services for consumers and small businesses. In March 1999, the Company acquired Net Roadshow, Inc. ("Net Roadshow"), the leading provider of Internet IPO roadshows, in order to quickly expand into Internet broadcasting for the financial services market. The Company believes it has accomplished numerous Internet achievements since its initial live broadcast in September 1995, including the Internet broadcast of the first live commercial radio station, first live sporting event, first live corporate quarterly earnings call and first live stockholders' meeting. The Company's early entrance into the Internet broadcasting market enabled the Company to establish strong brand recognition for its broadcasts and services and to form relationships with a diverse range of content providers. The Company currently offers content from a variety of sources including radio and television, college and professional sports teams and leagues, production and film studios, and record labels. The Company has broadcast over 19,500 live events, such as the last four NFL Super Bowls, the NCAA Basketball Tournament, the Stanley Cup Playoffs, the entire 1998-99 season for all 27 NHL teams, game broadcasts for over 350 college teams, the Internet premiere of the movie "Casablanca," an exclusive Internet-only webcast with Paul McCartney, the 1998 World Champion New York Yankees Ticker Tape Parade and the launch of the Space Shuttle with Astronaut John Glenn. The Company has also amassed over 65,000 hours of on-demand broadcast programming, including over 2,400 full-length music CDs, sports programming, talk radio, and business and media events. Broadcast.com's business services customers include 3Com, AutoDesk, Bell South, Harvard University, Business Week, Dell, E! Online, Epson, IBM, Intel, Oracle, Prudential, Tandem, Tenet Health Systems, Texaco, Trilogy and more than 600 other organizations. INDUSTRY BACKGROUND The Internet has grown rapidly in recent years, spurred by developments such as easy-to-use Web browsers, the availability of inexpensive multimedia PCs and Internet access, the adoption of more robust network architectures, and the emergence of compelling Web-based content and commerce applications. The broad acceptance of the Internet Protocol ("IP") standard has also led to the emergence of intranets and the development of a wide range of non-PC devices that enable users to access the Internet and intranets. 1 3 Much of the Internet's rapid evolution towards becoming a mass medium can be attributed to the accelerated pace of technological innovation, which has expanded the Web's capabilities and improved users' experiences. Most notably, the Internet has evolved from a mass of static, text-oriented Web pages and email services to a much richer environment, capable of delivering graphical, interactive and multimedia content. Prior to the development of streaming media technologies, users could not play back audio and video clips until the content was downloaded in its entirety. As a result, live Internet broadcasts were not possible and archived clips cumbersome to download and use. The development of streaming media products by companies such as Microsoft and RealNetworks enables the simultaneous transmission and playback (i.e., the Internet broadcast) of continuous "streams" of audio and video content over the Internet and intranets. These technologies have evolved to deliver audio and video over widely used 28.8 kilobits per second ("kbps") narrow bandwidth modems, yet can scale in quality to take advantage of higher speed access that is expected to be provided by xDSL, cable modems and other emerging broadband technologies. Broadcasting audio and video content over the Internet offers certain opportunities that are not generally available from traditional media. Currently available analog technology and government regulations limit the ability of radio and television stations to broadcast beyond certain geographic areas. Radios and televisions are not widely used in office buildings and other workplaces, where Internet access has become commonplace. Traditional business communication tools such as audio conferencing and videoconferencing can be costly, non-targeted and inconvenient. In addition, traditional broadcasters are limited in their ability to measure or identify in real time the listeners or viewers of a program. By using the Internet, streaming media content can be targeted to a geographically dispersed audience of customers, suppliers, employees and stockholders at relatively low costs. Internet users can interact with the broadcast content by responding to online surveys, voting in polls and obtaining additional information. In addition, Internet broadcasters can provide highly specific information about a program's audience to content providers, advertisers and users of Internet business services. The convergence of the Internet's capabilities and attributes has accelerated its acceptance as a business tool, leading to rapidly growing economic opportunities in Web-based advertising and business service offerings. The Company believes that several challenges must be overcome to realize cost-effective Internet broadcasting: aggregating diverse and compelling content, scaling Internet broadcasts from small to large audiences, deploying new transmission and streaming technologies in a timely manner and providing multimedia advertisements and services. In order to aggregate content, Internet broadcasters must rapidly identify and secure licensing opportunities by demonstrating to content providers broad based distribution and the ability to deliver associated traffic. Successful Internet broadcasters serving a large number of simultaneous users around the clock also need to design, develop and integrate complex network elements, including scalable bandwidth, streaming licenses, equipment and technical expertise. The rapid evolution of streaming media technologies requires Internet broadcasters to support multiple vendors, an investment few companies have made. The Company believes, therefore, that a successful Internet broadcaster must develop a well-branded, highly-trafficked Web portal and destination which offers compelling content, a network capable of streaming audio and video programming to large audiences 24 hours a day seven days a week and an organization that can deliver quality broadcasting services to advertisers, businesses and content providers. THE BROADCAST.COM SOLUTION Broadcast.com believes it has established a significant brand for its broadcasts and services on the Internet due to its breadth of content, network infrastructure, audience size and distribution capabilities. In addition, the Company's Web sites provide an attractive platform for advertisers seeking to target specific users with rich, compelling advertising solutions. Key elements of the broadcast.com solution include: LARGE AGGREGATION OF STREAMING MEDIA CONTENT Broadcast.com's Web sites offer a large and comprehensive selection of live and on-demand audio and video programming on the Internet, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and audio-books. The Company currently owns Internet broadcasting rights for more than 385 radio stations and networks, 40 television stations and cable networks and over 420 college 2 4 and professional sports teams. The Company has also amassed over 65,000 hours of on-demand broadcast programming, including over 2,400 full-length music CDs, sports programming, talk radio and business and media events. Broadcast content providers include Capitol Records, Granite Broadcasting, Learfield Communications, Major League Baseball, the NHL, Trimark Pictures and Turner Broadcasting System, Inc. The Company believes that its content aggregation has established www.broadcast.com as a leading destination for Internet users seeking streaming media content and also for multimedia content providers and advertisers seeking to reach large online audiences. This leading position, combined with the Company's broadcast networking capabilities and experience in establishing content relationships, further enables broadcast.com to attract compelling programming. LEADING PROVIDER OF INTERNET AND INTRANET BUSINESS SERVICES BROADCASTS The Company leverages its network infrastructure and expertise by providing Internet and intranet broadcasting and distribution services to businesses and other organizations. The Company's business services enable customers to conduct cost-effective Internet or intranet broadcasts of live and on-demand business and educational programming, including press conferences, quarterly earnings conference calls, investor conferences, trade shows, stockholder meetings, product introductions, training sessions, distance learning seminars, customized corporate TV channels and media events, tailored to each such customer's needs. The Company believes that these services differentiate its content and broaden its revenue base. The Company's business services customers include 3Com, AutoDesk, Bell South, Harvard University, Business Week, Dell, E! Online, Epson, IBM, Intel, Oracle, Prudential, Tandem, Tenet Health Systems, Texaco, Trilogy and more than 600 other organizations. LEADING INTERNET BROADCAST NETWORK INFRASTRUCTURE The Company's network infrastructure and expertise permits the Company to stream hundreds of live and on-demand audio and video programs over the Internet to hundreds of thousands of users. Broadcast.com's distribution network can support over 650 simultaneous live events and includes over 1,000 multimedia servers that support multiple streaming technologies. These servers are linked through direct 45 megabits per second ("Mbps") and 155 Mbps connections to major Internet backbone providers including AT&T, BBN, Cable & Wireless, MCI WorldCom and Sprint Corporation which, in turn, connect to over 80% of the downstream ISPs. The Company believes that direct connections to the major backbone providers help to enhance the end-user experience by avoiding the congestion of public peering points which can cause transmission delays or packet loss. The Company believes that its broadcast network infrastructure provides it with the flexibility to implement new software, hardware and system developments without incurring substantial redesign costs or down time. The Company also continues to deploy its multicast network which is designed to provide streaming media content to hundreds of thousands of users simultaneously through one-to-many Internet connections. Please see "--Network." BRANDED DISTRIBUTION The Company believes it has established a leading brand for streaming media content through its Web sites, which have been ranked by Media Metrix as among the Internet's Top 20 most frequently visited destinations. The Company drives traffic to its sites and enhances brand awareness through strategic relationships with key Internet companies. The Company has established increased visibility among Internet users through its relationships with Yahoo Inc., RealNetworks, Microsoft, Softbank (broadcast.com japan), and The Nasdaq Stock Market(R), among others. Please see "--Strategic Relationships." DIFFERENTIATED, INTERACTIVE MULTIMEDIA ADVERTISING Broadcast.com offers exclusive and comprehensive audio and video programming that can be targeted to specific audiences and demographics. Additionally, unlike Web sites that offer only text-based banner ads, the Company offers multimedia packages incorporating custom audio and video applications such as gateway ads with guaranteed click-thrus, channel and event sponsorships, and its new in-stream ads and in-player banner ads. The Company also provides advertisers with the opportunity to bundle Web and traditional media 3 5 advertising because of commercial spots it receives from its radio and television station content providers. Please see "--Sales and Marketing--Advertising." STRATEGY The Company's objective is to enhance its leadership position in Internet broadcasting by aggregating comprehensive audio and video programming, preferably on an exclusive basis, and providing services enabling the delivery of a broad range of streaming media content over the Internet. Key elements of the Company's strategy include the following: ENHANCE AND EXPAND EXCLUSIVE CONTENT OFFERINGS Broadcast.com seeks to provide the most comprehensive audio and video programming on the Internet. To this end, the Company's objective is to acquire exclusive, long-term Internet broadcast rights to streaming media content provided by radio and television stations, networks and ownership groups, college and professional sports teams and leagues, production and film studios, record labels and other content providers. FURTHER PENETRATE THE BUSINESS SERVICES MARKET The Company's broadcast services enable businesses, consumers and other organizations to improve communication with, and the dissemination of information to, customers, suppliers, employees and the investment community. The Company believes that its network infrastructure, the local and global reach of the Internet, and the integration of multicasting within corporate intranets provides business services customers with lower transmission costs than conventional broadcast and communications systems and enables these customers to access both large and small target audiences. The Company intends to continue to rapidly expand and optimize its turnkey broadcasting solutions to continue to enhance the broadcast experience for its business services customers. The Company has also recently established a consulting group whose primary focus is to multicast-enable corporate intranets and to assist customers with real-time internal corporate communications. Please see "--Sales and Marketing--Business Services." EXPAND INTERNET BUSINESS-TO-BUSINESS SALES FORCE Broadcast.com continues to expand its dedicated, experienced Internet sales force in order to increase its presence across both Business Services and Advertising. The Company currently employs 85 salespeople dedicated to further differentiating broadcast.com as a leading provider of Internet broadcasting solutions. The Company has also implemented a three-week training program, broadcast.com University, to train and equip incoming salespeople on the latest developments in Internet broadcasting and advertising solutions. The Company is expanding its sales team adding directors and account executives in strategic regions across the United States to continue delivering personalized service and acquire new customers across a variety of vertical markets, including the automotive, distance learning, financial services and healthcare industries. EXPAND NETWORK INFRASTRUCTURE Broadcast.com intends to expand its network infrastructure through the acquisition and deployment of additional network equipment, bandwidth and broadcast scaling technologies. As part of its network expansion strategy, the Company is deploying its multicast network which is designed to provide streaming media content to hundreds of thousands of users simultaneously through one-to-many Internet connections. The Company has entered into agreements with over 40 ISPs and UUNET (now a part of MCI WorldCom) and is building the first large-scale commercial multicast network, which provides the Company with access to over 470,000 dial-up multicast ports. The Company has developed software to more efficiently handle the broadcast of hundreds of simultaneous live events and developed proprietary software to handle broadcast blackouts, remote monitoring and remote server access. Although streaming video over the Internet does not currently offer broadcast television equivalent quality to a broad base of users, the Company believes that the quality of and demand for Internet video broadcasts will continue to improve as broadband Internet access technologies such as xDSL and cable modems become more commonly available. Further, the Company 4 6 believes that video is an important and essential element in the future of Internet broadcasting. Accordingly, the broadcast.com network is video enabled and supports multiple leading video streaming technologies including RealNetworks' RealPlayer G2 and Microsoft's Windows Media Player. Please see "--Network." CAPTURE AND DEVELOP EMERGING REVENUE OPPORTUNITIES Broadcast.com intends to capture strategic revenue growth opportunities as user demand increases and technological developments become more widely adopted. Such opportunities are expected to include pay-per-listen/view applications, fee-based sharing of the Company's exclusive content on other Web sites, insertion of commercials within programming, electronic commerce opportunities, Business Services Consulting and broadcasting for consumers and small businesses. PROGRAMMING The Company believes its Web sites offer a large and comprehensive selection of live and on-demand audio and video programming on the Internet, live continuous broadcasts of over 385 radio stations and networks, 40 television stations and cable networks, game broadcasts of more than 420 college and professional sports teams and over 65,000 hours of on-demand programming, including over 2,400 full-length music CDs, sports programming, talk radio, and business and media events. The www.broadcast.com Web site is organized into content channels. The following is a description of certain elements of broadcast.com's programming, illustrating the breadth and depth of its content: SPORTS The Company believes that it provides the most comprehensive live and on-demand broadcasting of sporting events on the Internet. The Company's early entrance into Internet broadcasting has allowed it to establish relationships with a broad range of sports teams and leagues. Broadcast.com has the Internet broadcasting rights for certain sporting events, including football and basketball in most cases, for over 150 colleges and universities participating in NCAA Division IA athletics, over 95% of which are on an exclusive basis. In addition, the Company is the exclusive streaming media partner for all of the 27 NHL teams and broadcasts on behalf of Major League Baseball most regular season and playoff games. The Company has handled the Internet broadcast for the last four Super Bowls and the NCAA Basketball Tournament, as well as the 1998 World Champion New York Yankees Ticker Tape Parade. PGA TOUR and broadcast.com provide Internet audiences with a variety of golf programming, including live reports hourly from each PGA TOUR stop on Thursdays and Fridays, PGA TOUR Radio, which includes live Saturday and Sunday stroke coverage from most tour events, and video highlights each Sunday night of the final round of each tour stop. In the case of special events, the Company often broadcasts complementary programming such as stadium announcer press box feeds and full-length post-game press conferences with players and coaches in lieu of, or in addition to, game broadcasts. Broadcast.com typically archives game broadcasts until the next game is played so users can access sporting events they may have missed. In addition, a "Great Games" section contains archives of a wide variety of classic match-ups for fans to access at any time. The Company's sports programming includes video programming as well, including arrangements with the NHL, PGA TOUR, Major League Baseball and numerous colleges and universities. 5 7 The following table illustrates the breadth of the sports content the Company is currently broadcasting, or has broadcast. BROADCAST.COM SPORTS PROGRAMMING NATIONAL HOCKEY LEAGUE Anaheim Mighty Ducks Boston Bruins Buffalo Sabres Calgary Flames Carolina Hurricanes Chicago Blackhawks Colorado Avalanche Dallas Stars Detroit Red Wings Edmonton Oilers Florida Panthers Los Angeles Kings Montreal Canadiens Nashville Predators New Jersey Devils New York Islanders New York Rangers Ottawa Senators Philadelphia Flyers Phoenix Coyotes Pittsburgh Penguins San Jose Sharks St. Louis Blues Tampa Bay Lightning Toronto Maple Leafs Vancouver Canucks Washington Capitals MAJOR LEAGUE BASEBALL Anaheim Angels Arizona Diamondbacks Baltimore Orioles Chicago White Sox Cincinnati Reds Cleveland Indians Houston Astros New York Mets New York Yankees Oakland Athletics Philadelphia Phillies San Diego Padres San Francisco Giants St. Louis Cardinals Texas Rangers GOLF PGA TOUR PGA of America Senior Tour USGA Nike Tour MAJOR LEAGUE SOCCER Chicago Fire Colorado Rapids Columbus Crew D.C. United NY/NJ Metrostars Dallas Burn Kansas City Wizards Los Angeles Galaxy Miami Fusion F.C. New England Revolution San Jose Clash Tampa Bay Mutiny AUTO RACING Selected In-car radio and events: ARCA CART Indy Racing League Motoworld "Supecross" NASCAR Winston Cup NASCAR Busch Series NHRA Performance Racing Network Professional SportsCar Racing Toyota Atlantic PRO FOOTBALL 1997 and 1998 NFL Training Camp Arena Football Canadian Football League 1997 Grey Cup (CFL) NFL Europe -- Audio and Video NFL pre- and post-game Coverage Super Bowls XXX, XXXI, XXXII and XXXIII HORSE RACING Belmont Stakes Kentucky Derby Preakness Stakes Breeder's Cup Capitol Racing Fair Grounds Gulfstream Churchill Downs Keeneland Lone Star Park Racing Meadowlands Monmouth New York Racing Association Oaklawn Santa Anita PRO BASKETBALL NBA Championship Press Conferences NBA Draft 1997 Continental Basketball Association Finals and All-Star Game "The Game" on Showtime OTHER SPORTS COVERAGE Boston Marathon HBO World Championship Minor League Baseball Minor League Hockey NBC 1996 Atlanta Olympics Interviews Tour de France U.S. Open Tennis United States Olympic Committee Press Conferences Wimbledon World Golf Village Opening Ceremonies 6 8 NCAA COLLEGES AND UNIVERSITIES Air Force Academy Falcons Alabama Crimson Tide Alaska-Fairbanks Nanooks Albion College Britons Alcorn State Braves Appalachian State Mountaineers Arizona Wildcats Arizona State Sun Devils Arkansas Razorbacks Arkansas Little Rock Trojans Arkansas State Indians Ball State Cardinals Baylor Bears Boise State Broncos Boston University Terriers Brigham Young Cougars Bucknell Bison Butler Bulldogs Cal-Berkeley Bears Cal State Fullerton Titans Central Florida Golden Knights Central Michigan Chipawas Clemson Tigers Colorado Buffaloes Connecticut Huskies Cornell Big Red Dayton Flyers Denver Pioneers Duke Blue Devils East Carolina Pirates Eastern Kentucky Colonels Florida Gators Florida State Seminoles Fresno State Bulldogs George Washington Colonials Georgetown Hoyas Georgia Bulldogs Georgia Southern Eagles Georgia Tech Yellow Jackets Harvard Crimson Southern Miss. Golden Eagles St. Bonaventure Bonnies St. Joseph's Hawks St. John's Red Storm St. Louis Billikens Hawaii Rainbows Houston Cougars Idaho Vandals Illinois State Redbirds Illinois-Chicago Flames Indiana Hoosiers Iowa Hawkeyes Iowa State Cyclones Jacksonville Dolphins James Madison Dukes Kansas Jayhawks Kansas State Wildcats Kentucky Wildcats Lamar Cardinals Lehigh Mountain Hawks Long Beach State 49ers Louisiana State Tigers Louisiana Tech Bulldogs Louisville Cardinals Marquette Golden Eagles Marshall Thundering Herd Maryland Terrapins Massachusetts Minutemen Memphis Tigers Merrimack Warriors Miami (Florida) Hurricanes Miami (Ohio) Redhawks Michigan State Spartans Mississippi Rebels Mississippi State Bulldogs Missouri Tigers Mount St. Mary's Mountaineers Naval Academy Midshipmen UNC Tar Heels UNC-Charlotte 49ers Nebraska Cornhuskers New Hampshire Wildcats New Mexico Lobos North Carolina St. Wolfpack North Texas Eagles Northern Arizona Lumberjacks Notre Dame Fighting Irish Ohio Bobcats Oklahoma Sooners Oklahoma State Cowboys Old Dominion Monarchs Oregon Ducks Oregon State Beavers Penn State Nittany Lions Pepperdine Waves Pittsburgh Panthers Portland State Vikings Princeton Tigers Purdue Boilermakers Radford Highlanders Rhode Island Rams Rice Owls Richmond Spiders Rutgers Scarlet Knights Samford Bulldogs San Diego State Aztecs San Francisco Dons San Jose State Spartans SE Louisiana Lions Seton Hall Pirates Siena College Saints SMU Mustangs South Carolina Gamecocks South Dakota Coyotes South Florida Bulls Southeastern Louisiana Lions St. Mary's Rattlers Stanford Cardinal Stephen F. Austin Lumberjacks SW Louisiana Cajuns Syracuse Orangemen TCU Horned Frogs Tennessee Volunteers Texas Longhorns Texas-El Paso Miners Texas A&M Aggies Texas Tech Red Raiders Toledo Rockets Trinity Tigers Tulane Green Wave Tulsa Hurricanes UAB Blazers UC-Santa Barbara Gauchos UCLA Bruins UNLV Rebels USC Trojans Utah Utes Vanderbilt Commodores Villanova Wildcats Virginia Cavaliers VA Commonwealth Rams Virginia Tech Hokies Wake Forest Demon Deacons Washington Huskies Washington State Cougars West Virginia Mountaineers Western Kentucky Hilltoppers Western Michigan Broncos Wichita State Shockers William and Mary Tribe Wisconsin Badgers Wisconsin Eau Claire Blugolds Wisconsin-LaCrosse Eagles Wright State Raiders Wyoming Cowboys Yale Bulldogs Youngstown State Penguins 7 9 RADIO Broadcast.com is the leading Internet broadcaster of radio programming, and owns rights to broadcast more than 385 stations based in over 115 cities, in most cases under exclusive multi-year agreements. The Company's relationships with radio stations and networks provide it with content from 18 of the nation's top 20 radio markets. The Company has benefited from its ability to license radio content from ownership groups, such as a group of over 40 stations which are a part of Clear Channel Communications, a group of 72 stations which are a part of Capstar Broadcasting Corporation and the 23-station Susquehanna Radio Corp family. Broadcast.com's radio programming spans all formats, from talk shows and news programs to country music and classic rock. The Company's audience benefits from the ability to receive local radio programming in-office and from outside the listener's geographic area, allowing users to select from hundreds of stations and dozens of formats. Broadcast.com is the exclusive provider of Internet broadcasts from popular top-rated nationally syndicated hosts Rush Limbaugh, Dr. Laura Schlessinger, Art Bell and Jim Rome. The Company also archives thousands of hours of selected talk radio programming so users can listen to their favorite shows and hosts when unable to listen to the live broadcast. TELEVISION Broadcast.com continues to expand its content aggregation strategy into television programming. The Company currently has video Internet broadcasting rights for 40 stations and cable networks and programming originated by local affiliated television stations and national networks. The Company recently reached an agreement with three ABC owned and operated stations (WABC New York, WPVI Philadelphia and KTRK Houston) to exclusively broadcast their local programming. The Company's relationships with television stations and networks provide it with content from eight of the nation's top ten television markets. The Company provides archives of newscasts so users can access the latest information on breaking news 24 hours a day seven days a week from their home or office. The Company believes that the continued emergence of broadband Internet access technologies have the potential to increase the demand for and quality of Internet-delivered video content, possibly leading to a convergence of the Internet and television. BUSINESS The Company is a leading aggregator of audio and video business-related content. In addition to the thousands of hours of events and special programming offered live and on demand from the Company's business services customers, the Company has also aggregated content from other sources to provide a complete business content channel, including video interviews and features from CNBC/Dow Jones Business Video and other business programming from its selection of radio and television content providers. Broadcast.com has broadcast quarterly earnings conference calls from such diverse companies as AOL, Millenium Chemical, Texaco and Yahoo!; product launches from Asymetrix, Dell and Sybase, Inc.; and keynote speeches from industry leaders such as Intel's Andy Grove, Hewlett Packard's Lewis Platt, and Microsoft's Bill Gates. In addition, broadcast.com is working with companies to develop customized Internet-only corporate TV broadcasts, such as the monthly "Breakfast with Dell" series, which features Dell executives speaking on topics of interest to its customers, and IBM's "Webinar" series, with topics ranging from "Knowledge Based Marketing in the Next Century" to "Data Management: The Six Universals." Broadcast.com's Interactive Group provides supplemental data and management services to accompany Internet broadcasts, such as proprietary database registration services and real-time audience measurement. Please see "--Business Services." VIDEO The Company provides Internet broadcasting services to entertainment and media companies, film studios, broadcast networks and other content providers. Content providers utilize broadcast.com's distribution network, technology, services, Web site promotions, email newsletter and sizable audience base to deliver and drive traffic to high profile events. The Company recently broadcast all of the live and on-demand Webcasts of the 1999 Academy Awards coverage with ABC.com, including red-carpet arrivals and backstage interviews in their entirety. The Company recently announced an agreement with Trimark Pictures under which it is 8 10 licensing Trimark's library of films for distribution over the Internet. In addition, the companies will work together to broadcast first run movies, previews, and live premieres and to distribute movies on the Internet under a variety of new revenue models including pay-per-view, electronic commerce, integrated advertising, personalized marketing and user interactive content. The broadcast.com Video Channel now showcases over 5,000 hours of on-demand video, streamed at bandwidths ranging from 56 kbps per second to 300 kbps. MUSIC Through the broadcast.com Jukebox, the Company believes it offers the largest selection of full-length CDs available for listening on demand over the Internet, currently numbering over 2,400 titles. The Company has entered into agreements with over 200 record labels to broadcast all or certain of their CDs in their entirety. Capitol Records and broadcast.com recently launched "CapitolBroadcasts," a co-branded music channel hosted on the broadcast.com Web site, showcasing audio and video programming from Capitol Records and its family of labels. Music fans can listen to and watch their favorite Capitol artists and compilations, in addition to full-length songs and videos from individual artists and soundtracks and live events from premier Capitol artists, including CD "Listening Parties" and live cybercasts. To expand its Jukebox selections, the Company intends to continue to form relationships with leading record companies. Current customer feedback indicates that listeners use the broadcast.com Jukebox as a way to sample new music and, in turn, purchase CDs that they enjoy. Accordingly, the Company believes that its Jukebox will provide an attractive platform for record labels and musicians to promote and sell their recordings over the Internet through broadcast.com. The Company has also broadcast numerous exclusive, high-profile concerts and events featuring leading musicians and groups such as Paul McCartney, Willie Nelson, Jewel and Rod Stewart, as well as concerts as a part of A&E's "Live By Request" series, featuring Phil Collins and Tony Bennett. OTHER PROGRAMMING The Company has aggregated thousands of hours of live and on-demand content in several other channels, providing broadcast.com users with a comprehensive selection of streaming media programming on the Company's Web sites. An illustrative list follows:
CHANNEL EXAMPLES ------- -------- AudioBooks Over 500 full length audio-books including: Charles Dickens' "A Tale of Two Cities" Jane Austen's "Pride and Prejudice" Education PBS The Business Channel Harris Methodist Continuing Education Seminars Rutgers University News BBC World Service CNN Audioselect Court TV Entertainment Paul McCartney Internet-only webcast "Casablanca" 1999 Academy Awards Coverage Special Interest Rush Limbaugh Dr. Laura Schlessinger Art Bell Spiritual The 700 Club "Love Worth Finding" with Adrian Rogers Reunion Church with Richard Ellis Technology CNET Radio IBM Netfinity Worldcast Y2K: The Press and Preventing Panic
9 11 BUSINESS SERVICES The Company's Business Services Division provides cost-effective Internet and intranet broadcasting services to businesses and other organizations. These business services include turnkey production of press conferences, earnings conference calls, investor conferences, tradeshows, stockholder meetings, product introductions, training sessions, distance learning seminars, customized corporate TV channels and media events. Since January 1997, the Company has broadcast over 2,600 business services events for customers such as 3Com, AutoDesk, Bell South, Harvard University, Business Week, Dell, E! Online, Epson, IBM, Intel, Oracle, Prudential, Tandem, Tenet Health Systems, Texaco, Trilogy and more than 600 other organizations. The Company's broadcast services enable these businesses and other organizations to improve communication with, and the dissemination of information to, customers, suppliers, employees and the investment community by: COST-EFFECTIVELY REACHING THE IN-OFFICE USER The proliferation of multimedia enabled networked personal computers and other Internet-attached devices in the workplace has created the opportunity for businesses to use the Internet and intranet to cost-effectively broadcast streaming media communications to both large and small targeted audiences. The Company is able to broadcast events to users who can view and listen to such broadcasts uninterrupted while continuing to perform other tasks on their computers. The Company has recently established a consulting group whose primary focus is to multicast-enable corporate intranets and to assist customers with real-time internal corporate communications. For example, broadcast.com was an integral team member in a Motorola company-wide broadcast to 30,000 of their worldwide employees, providing rapid dissemination of new company directives. Using IP Multicast and broadcast.com consulting and support, this event cost Motorola a fraction of what they spent the previous year to reach the same audience through satellite delivery to all of its worldwide locations. DELIVERING TURNKEY BROADCASTING SOLUTIONS The Company delivers turnkey Internet broadcasting solutions by providing analysis, telecommunications and, if necessary, on-site equipment and personnel to its business services customers. Based on the expertise gained from broadcasting more than 2,600 business services and over 19,500 total live events, the Company is able to determine the most effective way to capture the broadcast feed, whether by satellite, coupler or on-site with a team of its engineers. Once captured, the broadcast feed is then integrated with other content such as Powerpoint presentations and computer demonstration screens. Potential Internet congestion is bypassed by using a private point-to-point connection to the Company's broadcast center. The broadcast is then digitally distributed to the Internet audience via the Company's multicast distribution network, or, if desired, restricted to a limited audience utilizing password-protected access or player authentication. In addition, the Company can determine the total number of devices receiving a broadcast, the length of time such devices are receiving the broadcast and the broadcast quality. Please see "--Network." The Company's broadcast of the Victoria's Secret Fashion Show in February 1999 is an example of how Internet broadcasting is the new medium for companies to interact with consumers, collect valuable customer data, and ultimately drive sales of their products. Broadcast.com received a company record 2 million unique users to its Web site on the day of the event and drove sales of Victoria's Secret merchandise with the attention that was received from this high profile Web event. INNOVATIVELY ENHANCING THE BROADCAST EXPERIENCE The Company has established the Broadcast.com Interactive Group in order to provide business services clients a turnkey, complete end-to-end solution, based on clients' needs and objectives, that reaches far beyond the delivery of the media stream. Creative design and application development solutions are utilized in order to create compelling content and engage the user. User profiles are created, which provide the basis for the Company's proprietary application suite. Applications include the ability to control slide presentations, 10 12 conduct user surveys and audience polls, administer distance learning tests, solicit and answer questions from users and take roll of users online. Information is collected and logged to each user's profile, providing clients with a wealth of critical information in real time to help them better interact with and serve their users. A selection of companies that have utilized these turnkey solutions include Dell, Cisco Systems and Sprint. The depth and breadth of broadcast.com's experience and expertise includes numerous other business services events. An illustrative selection includes: BUSINESS AND FINANCIAL SHOWS Calico Technology Seminar Series CNBC/Dow Jones Business Video news updates Executive Talk Money Talk Radio Wall Street Tiger Investments: After Hours Trading Wall Street Review DISTANCE LEARNING Columbia Basin Cato Institute Darton University Johns Hopkins Medicine Rounds Krieble Institute USA Quality Learning Services University of Texas EARNINGS ANNOUNCEMENTS/INVESTOR RELATIONS America Online AT&T Dell General Motors Nike Texaco Texas Instruments KEYNOTE SPEECHES 3Com: Eric Benhamou Dell Computer: Michael Dell Hewlett Packard: CEO Lewis Platt IBM: John Brisbane Intel: CEO Dr. Andrew Grove Microsoft: Bill Gates Tandem: Patrick Smyth PRODUCT LAUNCHES Ameritech: Clearpath Wireless Launch Asymetrix: Cool Tools Bell & Howell: Scanner Division Mercedes Benz Microsoft Internet Explorer Launch Silicon Graphics Workstation Launch Victoria's Secret PUBLIC RELATIONS AOL/Netscape merger announcement Chicago Tribune's George Lazarus Communications Week: Meet the Editor Fox News Media Coffee Getting Ready for ORYX MSNBC: Meet the Editors The New York Financial Writers' Association SEMINARS Calico eSeminar Dell: Breakfast With Dell Harvard Seminar on Internet Society IBM Webinars Price Waterhouse LLP Technology Forecast SAS Institute: Data Mining Forum Sprint "Community of One" Webcast TRADE SHOWS/CONFERENCES COMDEX Internet World MacWorld Expo National Association of Broadcasters National Investor Relations Institute NetWorld + Interop PC Expo SALES AND MARKETING The Company sells business services and advertising through its direct sales force and through reseller arrangements. The Company currently maintains distinct sales departments for both of these revenue sources, however both departments work together to sell integrated packages. In addition, the Company maintains a marketing and public relations department to promote the broadcast.com brand and its services. BUSINESS SERVICES To date, the Company has focused its business services marketing efforts on larger companies in varied industries. Based on the success of these direct sales efforts, broadcast.com believes that it can successfully market its services to medium-sized and smaller businesses as well. The Company's recent acquisition of SimpleNet allows it to expand into Internet broadcasting services for the consumer and small business market. Broadcast.com and SimpleNet are working together to introduce self-service audio and video streaming to existing customers of SimpleNet's Web hosting service. Users will be able to create and broadcast their own 11 13 personalized audio and video programming, including Internet-only radio and television shows, business presentations and home movies, which will be accessible within minutes of setting up their service. The Company is constantly expanding its Internet sales force and is aggressively attacking vertical market opportunities. The Company seeks to expand its business services customer base and broadcast offerings by targeting industries and businesses that are early adopters of technological advancement. The Company's recent acquisition of Net Roadshow accelerates the expansion of broadcast.com's Internet broadcasting services to newly public companies by leveraging Net Roadshow's existing relationships with leading investment banking institutions. Broadcast.com is acquiring new customers first by attacking a variety of vertical markets, including the automotive, distance learning, financial services, and healthcare industries. The Company also utilizes reseller arrangements, whereby partners have the right to sell broadcast.com business services packages to their established customer base. World Color, a leader in the printing industry, provides broadcast.com with direct access to World Color's extensive client base of companies in the publishing and retail industries. Medialink, a leader in providing video and audio production, satellite distribution and press release services, also provides the Company with an additional channel to market its turnkey Internet broadcasting solutions. ADVERTISING The Company's wide variety of content offers the ability to sell advertising packages targeted to specific audiences and demographics. Additionally, unlike Web sites that offer only text-based banner advertisements, the Company offers multimedia packages incorporating custom audio and video applications such as gateway ads with guaranteed click-thrus, and channel and event sponsorships, as well as its new in-stream ads and in-player banner ads. Gateway Ads with Guaranteed Click-Thrus. Broadcast.com provides advertisers the opportunity to incorporate gateway ads into their Internet advertising packages. Gateway ads are audio or video clips that are inserted at the lead of selected programming, lasting from 15 to 30 seconds, that play prior to the audio or video content that has been selected by the user. A guaranteed click-thru is a pop-down browser window that automatically launches at the beginning of the gateway ad displaying an advertiser's Web site or other targeted information. Gateway ads are also available without guaranteed click-thrus. The Company currently sells these advertisements at a higher CPM than traditional banner ads because of their unique nature. Advertisers that have purchased gateway ads with guaranteed click-thrus include 3Com, Amazon.com and First USA. Channel and Event Sponsorships. The Company offers advertisers the ability to sponsor one or more of its programming channels or events, enabling advertisers to brand entire sections of the Company's Web sites. A channel or event sponsorship can involve the rotating and permanent placement of buttons, logos and Web site links, integrated gateway ads and mention on the broadcast.com home page, channel home page and email newsletter (which has over 425,000 current subscribers in over 175 countries). These sponsorships may also include promotional advertisements utilizing broadcast.com's radio and television spot inventory. Event sponsorships have been purchased by companies such as Pepsi, Intel and Microsoft. The Company typically sells these packages on a channel-by-channel or event-by-event basis. In-Stream Ads and In-Player Banner Ads. As streaming media technology advances, the Company continues to capitalize on new opportunities to differentiate its advertising solutions. The Company has introduced in-stream ads, which are advertisements within the Internet feed of programming, similar to a broadcast network. Another new application is the in-player banner ad, available on the RealNetworks RealPlayer G2. While listening to a radio station or CD, the user is delivered a rotating selection of video images and scrolling text, all linked directly to advertisers' Web sites, which, in effect, turn the player into a browser. This allows the advertiser to follow consumers wherever they may go on the broadcast.com Web site. These new applications have just been introduced and sell at higher CPM's due to their unique and effective nature. 12 14 As compensation for broadcasting radio and television station feeds, the Company receives on-air inventory of radio and, in certain instances, television ad spots or direct cash payments. The Company sells the majority of these advertising spots to traditional radio and television advertisers. As of December 31, 1998, the Company had over 3,500 radio spots per week available for sale. MARKETING The Company's marketing efforts are aimed at promoting the broadcast.com brand and the Company's audio and video programming and business services. The Company utilizes both traditional and innovative media vehicles for marketing and promotional purposes, including radio, television and print advertisements, as well as marketing arrangements with other leading Web sites, gateway ads with guaranteed click-thru's and in-player banner ads on the Company's Web sites and email newsletters. Radio and Television. The Company's radio and television content providers typically grant the Company a certain amount of commercial spot inventory. The commercial spots that the Company receives as part of its radio and television hosting activities can be used by the Company for promotion of the Company's programming and services. Radio and television stations also extend brand awareness for broadcast.com through required on-air mentions during their broadcasts. Print and Other Media. In exchange for Internet broadcasts of sporting events, colleges and universities provide advertising space for broadcast.com in various campus publications including gameday programs, newsletters and alumni magazines. Broadcast.com has also received advertising space in the official NCAA Basketball Tournament Final Four program and several major NCAA Football Bowl Game programs. In addition, the Company has received signage space at numerous college and university sporting events. Stadium public address announcements during certain sporting events also extend the Company's brand awareness. The Company has placed advertisements in targeted trade magazines, including AudioFile, Broadcasting and Cable and Meeting Planners International, and major daily papers such as the Chicago Tribune and USA Today. Online Marketing. The Company exchanges banner ads with other high traffic and targeted Web sites such as Yahoo!, FinancialWeb.com, AllCampus.com, CBS SportsLine, CNET and Lycos. The Company uses these opportunities to highlight its high profile live events and drive traffic to revenue generating channels. The banner ads are also used to promote business services customers' events in order to attract larger audiences. The Company extends brand awareness on the Internet by requiring that its logo and distinctive "listen/view button" be placed prominently on the Web pages of broadcast partners. Additionally, broadcast.com works with a growing number of search engines and live events guides that feature broadcast.com content and events, such as Microsoft's Web Events, Yahoo! NetEvents, Yack.com, NetGuide.com, Infobeat.com, Excite, Infoseek and Go2Net. Gateway Ads, In-Player Banner Ads and Email Newsletters. The Company utilizes media rich audio/video gateway ads and in-player banner ads to promote upcoming broadcast.com content offerings. The Company also distributes free semi-weekly email newsletters to over 425,000 registered subscribers in 175 countries which highlight events and programs for the upcoming week. In addition to its main newsletter highlighting programming from the entire site, the Company distributes sports-focused, business-focused and music-focused newsletters as well, and is developing additional specialty newsletters targeted to those interested in particular programming channels. In addition, the Company utilizes the newsletter distribution list to alert users, especially those in-office during the day, to major breaking news stories that are being broadcast on the Company's Web sites. STRATEGIC RELATIONSHIPS Broadcast.com has entered into strategic relationships with content providers and other key companies in order to continue building on the Company's competitive advantages. The Company believes that licensing content from third parties is preferable to creating content because such licensed content has existing demand and is self-replenishing. Key relationships include A.H. Belo Corporation, BBC World Service, Capitol Records, CNN, Granite Broadcasting, Host Communications, Learfield Communications, the NHL, Major 13 15 League Baseball, Susquehanna Radio Corp., Trimark Pictures, a group of over 40 stations now part of Clear Channel Communications and 72 stations now a part of Capstar Broadcasting Corporation. Broadcast.com leverages its content aggregation and Internet broadcast network through strategic relationships with key companies to increase traffic and brand awareness. During 1998, broadcast.com and Yahoo!, an equity investor in the Company, agreed to establish a co-branded area on the Yahoo! Web site at sports.yahoo.com to make available broadcast.com's programming and link to listen/view pages on the www.broadcast.com Web site. Broadcast.com also has an agreement with RealNetworks which provides for the placement of a link on the drop-down menu item for RealNetworks' RealPlayer G2 and RealPlayer Plus G2 streaming products to the Company's home page and five key channels on its sites. The Company believes that RealNetworks' streaming products have been downloaded more than 50 million times. Microsoft has selected broadcast.com as a high-level promotional and content partner for its Web Events programming guide, showcasing the breadth of content and variety of radio stations that broadcast.com offers to users of the Windows Media Player, including high-bandwidth content. In addition, Microsoft has also provided premier placement and is linking to more than 100 broadcast.com radio stations from its Windows Radio Toolbar, which is integrated into every version of Internet Explorer 5.0. The Company has established two key partnerships which it believes will enable it to extend the reach and distribution of its Internet broadcasting services to new markets. In January 1999, broadcast.com and Softbank formed a joint venture to launch broadcast.com japan, which will aggregate and broadcast Japanese language-based audio and video programming to Internet users, and will also sell broadcast.com's Internet and intranet broadcasting services to business customers in Japan. In addition, the joint venture will have access to broadcast.com's vast archive of English language-based programming, including sports events, music CDs and videos. In December 1998, The Nasdaq Stock Market(R) and broadcast.com partnered to provide Internet broadcasting services for quarterly earnings conference calls in a pilot program. Nasdaq's selection of broadcast.com as the exclusive broadcaster of earnings calls over the Internet for Nasdaq-100(R) entities serves to accelerate adoption of Internet broadcasting as a standard for investor relations and corporate communications and opens a new avenue for broadcast.com to sell its turnkey broadcasting services to these companies. NETWORK In order to support hundreds of thousands of simultaneous streaming media users on the Internet, the Company has developed and implemented an extensive streaming media aggregation and distribution network designed to ensure the broadcast quality of the content received from broadcasters and distributed to users. AGGREGATION The Company aggregates content from broadcasters through satellite feeds and direct network connections from content providers to its broadcast center where it is monitored for broadcast quality and encoded for delivery over the Internet. The satellite receiving system is currently comprised of 25 satellite dishes which can receive hundreds of simultaneous feeds from traditional broadcasts and live events. The Company also receives radio and television signals over a private frame relay network. This private network is designed to efficiently and securely feed content directly from broadcasters to the Company's headquarters, thus avoiding the congestion of public and private peering points on the Internet which can cause transmission delays or packet loss. The Company believes that the use of a private aggregation network enables the Company to control the broadcast quality of the content it receives. DISTRIBUTION Currently, the Company employs both unicasting (one user per Company originated stream) and multicasting (many users per Company originated stream) technologies to distribute streaming media content to users over the Internet. The Company's unicast network can provide content to tens of thousands of simultaneous users through over 1,000 multimedia servers which support multiple streaming technologies. These servers are linked through direct 45 Mbps and 155 Mbps connections to major Internet backbone providers including AT&T, BBN, Cable & Wireless, MCI WorldCom and Sprint which, in turn, connect to 14 16 over 80% of the downstream ISPs. The Company believes that direct connections to these major backbone providers enhance the user experience by avoiding the congestion of public and private peering points which can cause transmission delays or packet loss. Although the Company anticipates that unicasting will remain essential for archived and on-demand applications, it believes that multicasting, or similar scaling technology, is essential to the future of large-scale Internet broadcasting to mass audiences. The Company believes multicasting is especially suited to audio and video broadcasting and will be increasingly used in the delivery of streaming media content. Currently, the Company is deploying its multicast network which is designed to provide streaming media content to hundreds of thousands of users simultaneously through one-to-many Internet connections. The Company has entered into agreements with over 40 ISPs and UUNET and is building the first large-scale commercial multicast network which provides the Company access to over 470,000 dial-up multicast ports. COMPETITION The market for Internet broadcasting and services is highly competitive and the Company expects that competition will continue to intensify. The Company competes with (i) other Web sites, Internet portals and Internet broadcasters to acquire and provide content to attract users, (ii) videoconferencing companies, audio conferencing companies and Internet business services broadcasters, (iii) online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print, for a share of advertisers' total advertising budgets and (iv) local radio and television stations and national radio and television networks for sales of advertising spots. There can be no assurance that the Company will be able to compete successfully or that the competitive pressures faced by the Company, including those described below, will not adversely affect the Company's business. Competition among Web sites that provide compelling content, including streaming media content, is intense and is expected to increase significantly in the future. The Company competes against a variety of businesses that provide content through one or more mediums, such as print, radio, television, cable television and the Internet. Traditional media companies have not established a significant streaming media presence on the Internet and may expend resources to establish a more significant presence in the future. These companies have significantly greater brand recognition and financial, technical, marketing and other resources than the Company. The Company competes generally with other content providers for the time and attention of users and for advertising revenues. To compete successfully, the Company must license and then provide sufficiently compelling and popular content to generate users, support advertising intended to reach such users and attract business and other organizations seeking Internet broadcasting and distribution services. The Company competes with other Internet broadcasters and Web sites to acquire Internet broadcasting rights to compelling content. The Company believes that the principal competitive factors in attracting Internet users include the quality of service and the relevance, timeliness, depth and breadth of content and services offered. In the market for Internet distribution of radio and television broadcasts, the Company competes with ISPs, radio and television stations and networks that originate their own Internet broadcasts. RealNetworks' Real Broadcast Network and INTERVU Inc. deliver audio and video broadcasts over the Internet. In the area of sports content, the Company competes with ESPN.com. The Company also competes for the time and attention of Internet users with thousands of Web sites operated by businesses and other organizations, individuals, governmental agencies and educational institutions. For example, certain Web sites provide a collection of links to other Web sites with streaming media content. The Company expects competition to intensify and the number of competitors to increase significantly in the future. In addition, as the Company expands the scope of its content and services, it will compete directly with a greater number of Web sites and other media companies. Because the operations and strategic plans of existing and future competitors are undergoing rapid change, it is extremely difficult for the Company to anticipate which companies are likely to offer competitive services in the future. The Company competes with videoconferencing and teleconferencing companies, along with companies that provide Internet broadcasting services to businesses and other organizations. Principal competitive factors include price, transmission quality, transmission speed, reliability of service, ease of access, ease of use, customer support, brand recognition and operating experience. The Company's current and potential 15 17 competitors may have significantly greater financial, technical and marketing resources, longer operating histories and greater brand recognition. Traditional videoconferencing and teleconferencing may allow for a more interactive user experience. As prices for videoconferencing systems decrease and transmission quality increases, the installed base of videoconferencing systems may increase. Companies that provide media streaming software may also enter the market for Internet broadcast services. If media streaming technology and backbone bandwidth becomes more readily available to companies at low prices, the Company's customers may decide to broadcast their own programming. In particular, local exchange carriers, ISPs and other data communication service providers may compete in the future with a portion of or all of the Company's business services as technological advancements facilitate the ability of these providers to offer effectively these services. There can be no assurance that the Company will be able to compete successfully against current or future competitors for Internet broadcast services. The Company also competes with online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print for a share of advertisers' total advertising budgets. The Company believes that the principal competitive factors for attracting advertisers include the number of users accessing the Company's Web sites, the demographics of the Company's users, the Company's ability to deliver focused advertising and interactivity through its Web sites and the overall cost-effectiveness and value of advertising offered by the Company. There is intense competition for the sale of advertising on high-traffic Web sites, which has resulted in a wide range of rates quoted by different vendors for a variety of advertising services, making it difficult to project levels of Internet advertising that will be realized generally or by any specific company. Any competition for advertisers among present and future Web sites, as well as competition with other traditional media for advertising placements, could result in significant price competition. The Company believes that the number of companies selling Web-based advertising and the available inventory of advertising space have recently increased substantially. Accordingly, the Company may face increased pricing pressure for the sale of advertisements. Reduction in the Company's Web advertising revenues would adversely affect the Company's business. The Company competes for traditional media advertising sales with national radio and television networks, as well as local radio and television stations. Local radio and television content providers and national radio and television networks may have larger and more established sales organizations than the Company. These companies may have greater name recognition and more established relationships with advertisers and advertising agencies than the Company. Such competitors may be able to undertake more extensive marketing campaigns, obtain a more attractive inventory of ad spots, adopt more aggressive pricing policies and devote substantially more resources to selling advertising inventory. The Company's traditional media advertising sales efforts depend on the Company's ability to obtain an inventory of ad spots across the top radio and television markets. If the Company is unable to obtain such inventory, it could adversely affect the Company's business. GOVERNMENTAL REGULATION Although there are currently few laws and regulations directly applicable to the Internet, it is likely that new laws and regulations will be adopted in the United States and elsewhere covering issues such as privacy, pricing, sales taxes and characteristics and quality of Internet services. It is possible that governments will enact legislation that may be applicable to the Company in areas such as content, network security, encryption and the use of key escrow, data and privacy protection, electronic authentication or "digital" signatures, illegal and harmful content, access charges and retransmission activities. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation and personal privacy is uncertain. The majority of such laws were adopted before the widespread use and commercialization of the Internet and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Any such export or import restrictions, new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase the Company's cost of doing business or increase the Company's legal exposure, which could have a material adverse effect on the Company's business, financial condition and results of operations. 16 18 On October 28, 1998, the "Digital Millennium Copyright Act" ("DMCA") affecting the performance of sound recordings by certain subscription and nonsubscription transmission services was enacted. The DMCA permits statutory licenses for the performance of sound recordings and for the making of ephemeral recordings to facilitate transmissions. Under these statutory licenses, the Company will be required to pay licensing fees for the performance of sound recordings by the Company in original and archived programming and through retransmissions of radio broadcasts. The DMCA does not specify the rate and terms of the statutory licenses, which will be determined either through voluntary inter-industry negotiations or arbitration. By distributing content over the Internet, the Company also faces potential liability for claims based on the nature and content of the materials that it distributes, including claims for defamation, negligence or copyright, patent or trademark infringement, which claims have been brought, and sometimes successfully litigated, against Internet companies. While the current law generally states that entities like the Company, which provide interactive computer services, shall not be treated as the publisher or speaker with respect to third party content they distribute, the scope of the law's definition and limitations on liability have not been widely tested in court. Accordingly, the Company may be subject to such claims. To protect itself from such claims, the Company maintains media liability insurance as well as general liability insurance. Additionally, in the Company's agreements with content providers, such content providers generally represent that they have the rights to distribute and transmit their programming on the Internet and, in most cases, indemnify the Company for liability based on a breach of such representations and warranties. The indemnification arrangements and the Company's media and general liability insurance may not cover all potential claims of this type or may not be adequate to indemnify the Company for any liability that may be imposed. Any liability not covered by indemnification or insurance or in excess of indemnification or insurance coverage could adversely affect the Company's business. INTELLECTUAL PROPERTY The Company regards its copyrights, trademarks, trade secrets and similar intellectual property as important to its success, and the Company relies on a combination of copyright and trademark laws, trade secret protection, confidentiality and non-disclosure agreements and contractual provisions with its employees and with third parties to establish and protect its proprietary rights. There can be no assurance that these steps will be adequate, that the Company will be able to secure trademark registrations for all of its marks in the United States or other countries or that third parties will not infringe upon or misappropriate the Company's copyrights, trademarks, service marks and similar proprietary rights. In addition, effective copyright and trademark protection may be unenforceable or limited in certain countries, and the global nature of the Internet makes it impossible to control the ultimate destination of the Company's broadcasts. In the future, litigation may be necessary to enforce and protect the Company's trade secrets, copyrights and other intellectual property rights. The Company may also be subject to litigation to defend against claims of infringement of the rights of others or to determine the scope and validity of the intellectual property rights of others. If third parties hold trademark, copyright or patent rights that conflict with the business of the Company, then the Company may be forced to litigate infringement claims that could result in substantial costs to the Company. In addition, if the Company was unsuccessful in defending such a claim, it could adversely affect the Company's business. Lawsuits alleging patent infringement were filed against the Company and RealNetworks on or about August 25, 1998 and against the Company and Microsoft on or about December 29, 1998. The Company intends to vigorously defend against these actions and seek their early dismissal. Please see "Item 3. Legal Proceedings." If third parties prepare and file applications in the United States that claim trademarks used or registered by the Company, the Company may oppose those applications and be required to participate in proceedings before the United States Patent and Trademark Office to determine priority of rights to the trademark, which could result in substantial costs to the Company. An adverse outcome in litigation or privity proceedings could require the Company to license disputed rights from third parties or to cease using such rights. Any litigation regarding the Company's proprietary rights could be costly and divert management's attention, result in the loss of certain of the Company's proprietary rights, require the Company to seek licenses from third parties and prevent the Company from selling its services. In addition, inasmuch as the Company licenses a substantial portion of its content from third parties, its exposure to copyright infringement 17 19 actions may increase because the Company must rely upon such third parties for information as to the origin and ownership of such licensed content. The Company generally obtains representations as to the origins and ownership of such licensed content and generally obtains indemnification to cover any breach of any such representations; however, there can be no assurance that such representations will be accurate or given, or that such indemnification will adequately protect the Company. In December 1997, in anticipation of the change in the Company's name from AudioNet, Inc. to broadcast.com, the Company filed an application for a United States trademark registration for "broadcast.com." There can be no assurance that the Company will be able to secure such a registered trademark. The Company intends to pursue the registration of its trademarks based upon anticipated use internationally. There can be no assurance that the Company will be able to secure adequate protection for these trademarks in foreign countries. Many countries have a "first-to-file" trademark registration system and thus the Company may be prevented from registering its marks in certain countries if third parties have previously filed applications to register or have registered the same or similar marks. It is possible that competitors of the Company or others will adopt service names similar to the Company's, thereby impeding the Company's ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trademark or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term broadcast.com. As part of its confidentiality procedures, the Company generally enters into agreements with its employees and consultants and limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company will prevent misappropriation of its proprietary information or that agreements entered into for that purpose would be enforceable. Notwithstanding the precautions taken by the Company, it might be possible for a third party to copy or otherwise obtain and use the Company's proprietary information without authorization. The laws of some countries may afford the Company little or no effective protection of its intellectual property. EMPLOYEES As of December 31, 1998, the Company had 283 full-time employees. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its relations with its employees are good. ITEM 1A. COMPANY RISK FACTORS WE HAVE A LIMITED OPERATING HISTORY We commenced broadcasting live audio programming on the Web in September 1995 and live video programming in March 1997. We first recognized business services and advertising revenues in January 1996 and have recorded a net loss for each year we have existed. We have a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, difficulties and uncertainties frequently encountered by companies in an early stage of development, particularly companies in new and rapidly evolving markets such as the market for Internet content, business services and advertising. These risks include our ability to: - provide compelling and unique content to Internet users; - successfully market and sell our business services; - effectively develop new and maintain existing relationships with advertisers, content providers, business customers and advertising agencies; - continue to develop and upgrade our technology and network infrastructure; - respond to competitive developments; - successfully introduce enhancements to our existing products and services to address new technologies and standards; 18 20 - effectively sell our inventory of radio and television ad spots and - attract, retain and motivate qualified personnel. Our operating results are also dependent on factors outside of our control, such as the availability of compelling content and the development of broadband networks that support multimedia streaming. There can be no assurance that we will be successful in addressing these risks, and failure to do so could have adversely affect our business. WE ANTICIPATE CONTINUING LOSSES We expect to continue to incur operating losses for the foreseeable future. We incurred net losses of $3.3 million for the period from May 1995 (inception) through December 31, 1996, $6.7 million for the year ended December 31, 1997, and $16.4 million for the year ended December 31, 1998. As of December 31, 1998, our accumulated deficit was $26.4 million. We expect to continue to incur significant operating and capital expenditures and, as a result, we will need to generate significant revenues to achieve and maintain profitability. Although our revenues have continued to grow from quarter to quarter, we cannot assure you that we will achieve sufficient revenues for profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business will be materially and adversely affected. OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include: - the cost of acquiring and the availability of content; - the demand for our business services; - demand for Internet advertising; - seasonal trends in Internet advertising placements; - the advertising cycles for, or the addition or loss of, individual advertisers; - the level of traffic on our Web sites; - the amount and timing of capital expenditures and other costs relating to the expansion of operations; - price competition or pricing changes in Internet broadcasting services, such as business services, and in Internet advertising; - the seasonality of the content of our broadcasts, such as sporting and other events; - the level of and seasonal trends in the use of the Internet; - technical difficulties or system downtime; - the cost to acquire sufficient bandwidth or to integrate efficient broadcast technologies, such as multicasting, to meet our needs; - the introduction of new products or services by us or our competitors, - our ability to successfully integrate operations and technologies from acquisitions; and - general economic conditions and economic conditions specific to the Internet, such as electronic commerce and online media. 19 21 Any one of these factors could cause our revenues and operating results to vary significantly in the future. In addition, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or acquisitions that could cause significant declines in our quarterly operating results. SEASONAL AND CYCLICAL PATTERNS MAY AFFECT OUR BUSINESS We expect that our revenues will be higher leading up to and during major United States sport seasons for sports that we broadcast, such as the NHL and college football, and lower at other times of the year. We believe that advertising sales in television and radio generally are lower in the first and third calendar quarters of each year, and that advertising expenditures fluctuate significantly with economic cycles. Depending on the extent to which the Internet is accepted as an advertising medium, seasonality and cyclicality in the level of Internet advertising expenditures could become more pronounced than it is currently. We believe that our revenues from Web and traditional media advertising sales have been affected by these cyclical factors and we expect our Web and traditional media advertising sales generally to follow the quarterly trends of traditional media advertising. WE ARE DEPENDENT ON THIRD PARTY CONTENT PROVIDERS Our future success depends upon our ability to aggregate and deliver compelling content over the Internet. We typically do not create our own content. Rather, we rely on third party content providers, such as radio and television stations and cable networks, businesses and other organizations, universities, film producers and distributors, and record labels for compelling and entertaining content. Our ability to maintain and build relationships with content providers is critical to our success. Although many of our agreements with third party content providers are for initial terms of more than two years, such agreements may not be renewed or may be terminated prior to the expiration of their terms if we do not fulfill our contractual obligations. Our inability to secure licenses from content providers or performance rights societies or the termination of a significant number of content provider agreements would decrease the availability of content that we can offer users. Such inability or termination may result in decreased traffic on our Web sites and, as a result, decreased advertising revenue, which could adversely affect our business. Our agreements with certain of our content providers are nonexclusive, and many of our competitors offer, or could offer, content that is similar to or the same as that obtained by us from such nonexclusive content providers. Such direct competition could adversely affect our business. WE ARE SUBJECT TO LICENSE FEES PAYABLE TO CONTENT PROVIDERS License fees payable to content providers and performance rights societies and other licensing agencies may increase as competition for such content increases. There can be no assurance that our content providers, performance rights societies and other licensing agencies will enter into prospective agreements with us on the same or similar terms as those currently in effect or on terms acceptable to us if no agreement is in effect. If we are required to pay increased licensing fees, such increased payments could adversely affect our business. OUR BUSINESS IS DEPENDENT ON BUSINESS SERVICES REVENUES We expect to derive a substantial amount of our revenues from providing our business services, and demand and market acceptance for our business services solutions is uncertain. Our ability to establish and maintain a leadership position in Internet and intranet broadcasting for businesses and in the distribution of other live and on-demand events will depend on, among other things: - our success in providing quality programming at low and high bit rates over the Internet; - market acceptance of our current and future business service offerings; - the reliability of our networks and services; and 20 22 - the extent to which end users are able to receive our broadcasts at adequate bit rates to provide for high quality services, none of which can be assured. We operate in a market that is at a very early stage of development, is rapidly evolving and is characterized by an increasing number of competitors. Demand and market acceptance for recently introduced services are subject to a high level of uncertainty and risk. Sales of our business services may require an extended sales effort in certain cases. In addition, potential customers must accept audio and video broadcast services as a viable alternative to face-to-face meetings, television or radio, audio teleconferences and video conferencing. Because the market for our business services is new and evolving, it is difficult to predict the size of this market and its growth rate, if any. In addition, it is not known whether businesses and other organizations will utilize the Internet to any significant degree as a means of broadcasting business and other events. There can be no assurance that the market for our business services will continue to develop or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if our Web sites do not achieve or sustain market acceptance, our business could be adversely affected. WE ARE DEPENDENT ON THE ACCEPTANCE OF STREAMING MEDIA TECHNOLOGY Our success depends on the market acceptance of streaming media technology provided by companies such as RealNetworks and Microsoft. Early streaming media technology suffered from poor audio quality, and video streaming at 28.8 kbps (thousands of bits per second) currently is of lower quality than television or radio broadcasts. In addition, congestion over the Internet and packet loss may interrupt audio and video streams, resulting in unsatisfying user experiences. In order to receive streamed media adequately, users generally must have multimedia PCs with certain microprocessor requirements and at least 28.8 kbps Internet access and streaming media software. Users typically electronically download such software and install it on their PCs. Such installation may require technical expertise that some users do not possess. Furthermore, in order for users to receive streaming media over corporate intranets, information systems managers may need to reconfigure such intranets. Because of bandwidth constraints on corporate intranets, some information systems managers may block reception of streamed media. Widespread adoption of streaming media technology depends on overcoming these obstacles, improving audio and video quality and educating customers and users in the use of streaming media technology. If streaming media technology fails to achieve broad commercial acceptance or such acceptance is delayed, our business could be adversely affected. WE ARE DEPENDENT ON THE CONTINUED ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM We expect to derive a substantial amount of our revenues from sponsorships and advertising for the foreseeable future, and demand and market acceptance for Internet advertising solutions is uncertain. There are currently no standards for the measurement of the effectiveness of Internet advertising, and the industry may need to develop standard measurements to support and promote Internet advertising as a significant advertising medium. If such standards do not develop, existing advertisers may not continue their levels of Internet advertising. Furthermore, advertisers that have traditionally relied upon other advertising media may be reluctant to advertise on the Internet. Our business would be adversely affected if the market for Internet advertising fails to develop or develops more slowly than expected. Different pricing models are used to sell advertising on the Internet. It is difficult to predict which, if any, will emerge as the industry standard. This makes it difficult to project our future advertising rates and revenues. Our advertising revenues could be adversely affected if we are unable to adapt to new forms of Internet advertising. Moreover, software programs that limit or prevent advertising from being delivered to an Internet user's computer are available. Widespread adoption of this software could adversely affect the commercial viability of Internet advertising. 21 23 WE MAY BE UNABLE TO SUCCESSFULLY EXPAND OUR BUSINESS If we are unable to manage our growth effectively, our business could suffer. We have experienced and are currently experiencing a period of significant growth. This growth has placed, and our anticipated future growth will continue to place, a significant strain on our resources. As part of this growth, we will have to implement new operational and financial systems, procedures and controls. WE MAY NOT BE ABLE TO INTEGRATE THE OPERATIONS FROM OUR RECENT ACQUISITIONS OF SIMPLENET AND NET ROADSHOW We recently acquired Simple Networks Communications in November 1998 and Net Roadshow in March 1999. We could have difficulty in assimilating their personnel, operations, technology and software. In addition, the key personnel of SimpleNet or Net RoadShow may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our business. WE MAY NOT BE ABLE TO ACCOUNT FOR THE ACQUISITIONS OF SIMPLENET AND NET ROADSHOW AS ANTICIPATED We accounted for the acquisitions of Net RoadShow and SimpleNet under the pooling of interest accounting and financial reporting rules. To qualify the acquisitions as a pooling of interests for accounting purposes, the criteria for pooling of interests accounting established in opinions published by the Accounting Principals Board and interpreted by the Financial Accounting Standards Board and the SEC must be met. Although the conditions to the consummation of each of the acquisitions were met, the availability of pooling of interests accounting treatment depends in part, upon circumstances and events occurring after the effective time of such acquisitions. For example, there must be no significant dispositions of assets, for a period of two years following the effective time. The failure of either of the acquisitions to qualify for pooling of interest accounting treatment for financial reporting purposes for any reason could adversely affect our operating results. OUR SYSTEMS MAY FAIL OR EXPERIENCE A SLOW DOWN AND OUR USERS DEPEND ON OTHERS FOR ACCESS TO OUR WEB SITES The performance, reliability and availability of our Web sites and network infrastructure are critical to our reputation and ability to attract and retain users, advertisers and content providers. A large portion of our network infrastructure is located at a single, leased facility in Dallas, Texas. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, Internet breakdowns, break-ins, tornadoes and similar events. We have only limited redundant facilities and systems and no formal disaster recovery plan and do not carry sufficient business interruption insurance to compensate for losses that may occur. Services based on sophisticated software and computer systems often encounter development delays and the underlying software may contain undetected errors that could cause system failures when introduced. Any system error or failure that causes interruption in availability of content or an increase in response time could result in a loss of potential or existing business services customers, users, advertisers or content providers and, if sustained or repeated, could reduce the attractiveness of our Web sites to such entities or individuals. In addition, because our Web advertising revenues are directly related to the number of advertisements delivered by us to users, system interruptions that result in the unavailability of our Web sites or slower response times for users would reduce the number of advertisements delivered and reduce revenues. A sudden and significant increase in traffic on our Web sites could strain the capacity of the software, hardware and telecommunications systems deployed or utilized by us, which could lead to slower response times or system failures. Our operations also are dependent upon receipt of timely feeds from our content providers, and any failure or delay in the transmission or receipt of such feeds could disrupt our operations. We are dependent upon Web browsers, Internet Service Providers ("ISPs") and online service providers ("OSPs") to provide Internet users access to our Web sites. Many of these providers have experienced 22 24 significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. OUR NETWORK IS SUBJECT TO SECURITY RISKS Our networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in our Internet operations. ISPs and OSPs have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. WE ARE DEPENDENT ON SHORT-TERM ADVERTISING CONTRACTS A substantial portion of our Web advertising revenues are derived from short-term contracts. There can be no assurance that our current advertisers will continue to purchase advertisements or that we will be able to secure new advertising contracts from existing or future customers at attractive rates or at all. THERE IS INTENSE COMPETITION FOR INTERNET BROADCASTING AND SERVICES The number of Web sites competing for the attention and spending of members, users and advertisers has increased and we expect it to continue to increase. We compete for members, users and advertisers with the following types of companies: - other Web sites, Internet portals and Internet broadcasters to acquire and provide content to attract users; - videoconferencing companies, audio conferencing companies and Internet business services broadcasters; - online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print, for a share of advertisers' total advertising budgets; and - local radio and television stations and national radio and television networks for sales of advertising spots. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could adversely affect our business. Please see "Item 1. Business--Competition." WE ARE DEPENDENT ON OUR ABILITY TO SELL RADIO AND TELEVISION ADVERTISING SPOTS We are dependent, in part, on our ability to sell our inventory of radio and television ad spots obtained from stations in exchange for the Internet broadcast of their programming. Selling radio and television advertising is highly competitive. We depend on Premiere Radio Networks, Inc. ("Premiere Radio Networks") to sell a majority of our radio ad spots. The Company's traditional media advertising sales efforts are focused on selling ads to traditional national advertisers in order to avoid competing with advertising sales efforts of its local radio and television station content providers. Sales of ad spots to national advertisers are typically sold at a lower cost per thousand ("CPM") than local advertising. We compete for traditional media advertising sales with national radio and television networks. National radio and television networks typically have larger and more established sales organizations as compared to ours. There can be no assurance that Premiere Radio Networks will continue to sell effectively our inventory of ad spots or that competitive pressures with respect to traditional media advertising sales will not adversely affect our business. WE MAY NOT BE ABLE TO SUCCESSFULLY SCALE OUR OPERATIONS Our success depends on our ability to broadcast audio and video programming to a large number of simultaneous users. Until recently, we only deployed unicasting (one user per Company originated stream) 23 25 technology to broadcast audio and video programming to users over the Internet. We have deployed another broadcast technology, multicasting (multiple users per Company originated stream), on a trial basis since September 1997 and have begun to deploy this technology on a broader commercial basis only recently. We anticipate that unicasting will continue to be used to distribute our archived and on-demand programming and that multicasting or a similar broadcasting technology will be used for live and other events where a large audience for the content is expected. To increase our unicast capacity, we will be required to successfully expand its network infrastructure through the acquisition and deployment of additional network equipment and bandwidth. There can be no assurance that we will be successful in such expansion. We believe that to be a successful Internet broadcaster we also must successfully deploy multicasting or a similar broadcasting technology that can deliver streaming media content to many users simultaneously through one-to-many Internet connections. We will be required to test, deploy and successfully scale our multicast network infrastructure to serve mass audiences. There can be no assurance that we will be successful in doing so, that multicasting will be able to support a substantial audience or that an alternative technology will not emerge that offers superior broadcasting technology as compared to multicasting. In the event that multicasting technology is not successfully deployed in a timely manner or such an alternative technology emerges, we would likely be required to expend significant resources to deploy a technology other than multicasting, which could adversely affect our results of operations during the period in which we attempt such deployment. If we fail to scale our broadcasts to large audiences of simultaneous users, such failure could adversely affect our business. WE ARE DEPENDENT ON PROVIDERS OF STREAMING MEDIA PRODUCTS We rely on providers of streaming media products, such as RealNetworks and Microsoft, to provide a broad base of users with streaming media software. We currently license software products that enable the broadcast of streaming media from such companies and others. We may need to acquire additional licenses from such streaming media companies to meet our future needs. Users are currently able to download electronically copies of the RealNetwork's RealPlayer and Microsoft's Windows Media Player software free of charge. If providers of streaming media products substantially increase license fees charged to us for the use of their products, refuse to license such products to us or begin charging users for copies of their player software, such actions could adversely affect our business. WE ARE DEPENDENT ON CONTINUED GROWTH IN THE USE OF THE INTERNET AND STREAMING MEDIA CONTENT Our market is new and rapidly evolving. Our business would be adversely affected if Internet usage does not continue to grow, particularly usage for multimedia information and entertainment and as a vehicle for commerce in goods and services. The Internet may not be accepted as a viable commercial medium for broadcasting multimedia content, if at all, for a number of reasons, including: - potentially inadequate development of the necessary infrastructure, - inadequate development of enabling technologies, - lack of acceptance of the Internet as a medium for distributing streaming media content; and - inadequate commercial support for Web-based advertising. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth, specifically the demands of delivering high quality video content and its performance and reliability may decline. In addition, Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays frequently occur in the future, Internet usage, as well as the usage of our Web sites, could grow more slowly or decline. 24 26 WE MAY BE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY Our market is characterized by rapid technological developments, frequent new product introductions and evolving industry standards. A failure by us to rapidly respond to technological developments could adversely affect our business. The emerging character of these products and services and their rapid evolution will require us to: - effectively use leading technologies; - continue to develop our technological expertise; and - enhance our current services and continue to improve the performance, features and reliability of our network infrastructure. Changes in network infrastructure, transmission and content delivery methods and underlying software platforms and the emergence of new broadband technologies, such as xDSL and cable modems, could dramatically change the structure and competitive dynamic of the market for streaming media solutions. In particular, technological developments or strategic partnerships that accelerate the adoption of broadband access technologies or advancements in streaming and compression technologies may require us to expend resources to address these developments. In addition, the widespread adoption of new Internet technologies or standards could require substantial expenditures to modify or adapt our Web sites and services. OUR BUSINESS IS DEPENDENT ON OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT Our future success depends to a significant extent on the continued services of our senior management and other key personnel, particularly, Todd Wagner, Chief Executive Officer, and Mark Cuban, President. The loss of the services of Messrs. Wagner or Cuban, or certain other key employees, would likely have a significantly detrimental effect on our business. We do not maintain "key person" life insurance for any of our personnel. Our future success also depends on our continuing to attract, retain and motivate highly skilled employees. COMPETITION FOR PERSONNEL IN OUR INDUSTRY IS INTENSE We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we do not succeed in attracting new personnel or retaining and motivating our current personnel, our business will be adversely affected. WE MAY NOT BE SUCCESSFUL IN EXPANDING INTERNATIONALLY We are developing, through a joint venture with Softbank Corp., broadcast.com japan k.k. To date, we have had limited experience in the development of localized versions of our Web sites and the marketing and operating of our products and services internationally. We are dependent on the efforts and abilities of Softbank Corp. in the development of broadcast.com japan k.k. Our Japanese joint venture may not develop at a rate that supports its level of investment. In particular, the Japanese market may be slow in the adoption of the Internet as a broadcast, advertising and commerce medium. We may also experience difficulty in managing our Japanese operations as a result of distance and language and cultural differences. In addition, there may be unexpected changes in regulatory requirements, trade barriers, difficulties in staffing and managing a foreign operation, longer payment cycles, currency exchange rate fluctuations, export restrictions, unanticipated seasonal reductions in business activity in Japan, and potentially adverse tax consequences. One or more of these factors could adversely affect our business. 25 27 GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO DOING BUSINESS ON THE INTERNET There are currently few laws and regulations directly applicable to the Internet. It is likely that existing laws will be adopted, and that new laws and regulations will be adopted in the United States and elsewhere covering issues such as music licensing, broadcast license fees, copyrights, privacy, pricing, sales taxes and characteristics and quality of Internet services. The adoption of restrictive laws or regulations could slow Internet growth or expose us to significant liabilities associated with content available on our Web sites. The application of existing laws and regulations governing Internet issues such as property ownership, libel and personal privacy is also subject to substantial uncertainty. There can be no assurance that current or new government laws and regulations, or the application of existing laws and regulations (including laws and regulations governing issues such as property ownership, content, taxation, defamation and personal injury), will not expose us to significant liabilities, significantly slow Internet growth or otherwise adversely affect our business. On October 28, 1998, the "Digital Millennium Copyright Act" ("DMCA") was enacted. The DMCA includes statutory licenses for the performance of sound recordings and for the making of recordings to facilitate transmissions. Under these statutory licenses, we will be required to pay licensing fees for the performance of sound recordings by us in original and archived programming and through retransmissions of radio broadcasts. The DMCA does not specify the rate and terms of the statutory licenses, which will be determined either through voluntary inter-industry negotiations or arbitration. Depending upon the rates and terms adopted for the statutory licenses, the DMCA could adversely affect our business. We currently do not collect sales or other taxes with respect to the sale of services or products in states and countries where we believe we are not required to do so. One or more states or countries have sought to impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more states or countries that we should collect sales or other taxes on products and services, or remit payment of sales or other taxes for prior periods, could adversely affect our business. The Child Online Protection Act and Child Online Privacy Protection Act (the "COPA") were enacted in October 1998. COPA imposes civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13. We do not currently distribute the types of materials that we believe COPA would deem illegal, and do not knowingly collect and disclose personal information from such minors. The manner in which the COPA may be interpreted and enforced cannot be fully determined, and future legislation similar to the COPA could subject us to potential liability, which in turn could adversely affect our business. Such laws could also damage the growth of the Internet generally and decrease the demand for our products and services. WE MAY BE SUED FOR INFORMATION RETRIEVED FROM THE WEB We may be subjected to claims for negligence, copyright, patent, trademark, defamation, indecency and other legal theories based on the nature and content of the materials that we broadcast. Such claims have been brought, and sometimes successfully pressed, against Internet content distributors. In addition, we could be exposed to liability with respect to the content or unauthorized duplication or broadcast of content. Although we maintain general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. In addition, although we generally require our content providers to indemnify us for such liability, such indemnification may be inadequate. Any imposition of liability that is not covered by insurance, is in excess of insurance coverage or is not covered by an indemnification by a content provider could adversely affect our business. WE HAVE LIMITED PROTECTION OF OUR INTELLECTUAL PROPERTY; OTHERS COULD MISAPPROPRIATE OUR INTELLECTUAL PROPERTY AND WE MAY NOT BE ABLE TO ENFORCE OUR RIGHTS Our actions to protect our trademarks and other proprietary rights may be inadequate. In addition, it is possible that we could become subject to infringement actions based upon content we may license from third 26 28 parties. Any of these claims, with or without merit, could subject us to costly litigation and the diversion of our financial resources and technical and management personnel. Further, if such claims are successful, we may be required to change our trademarks, alter the content and pay financial damages. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. We may need to obtain licenses from others to refine, develop, market and deliver new services. We cannot assure you that we will be able to obtain any such licenses on commercially reasonable terms or at all or that rights granted pursuant to any licenses will be valid and enforceable. In addition, because we license a substantial portion of our content from third parties, our exposure to copyright infringement actions may increase because we must rely upon such third parties for information as to the origin and ownership of such licensed content. We generally obtain representations as to the origins and ownership of such licensed content and generally obtain indemnification to cover any breach of any such representations; however, there can be no assurance that such representations will be accurate or given, or that such indemnification will adequately protect us. Lawsuits alleging patent infringement were filed against us (and RealNetworks) on or about August 25, 1998, and against us (and Microsoft) on or about December 29, 1998. We intend to vigorously defend against these actions and seek their early dismissals. In addition, we believe we are entitled to be indemnified under the terms of our license agreements with RealNetworks and Microsoft for the claims raised by the plaintiffs in these lawsuits. We can give no assurances, however, as to the availability of such indemnification at this time or the results of such proceedings. Please see "Item 3. Legal Proceedings." If third parties prepare and file applications in the United States that claim trademarks used or registered by us, we may oppose those applications and be required to participate in proceedings before the United States Patent and Trademark Office to determine priority of rights to the trademark, which could result in substantial costs. An adverse outcome in litigation or privity proceedings could require us to license disputed rights from third parties or to cease using such rights. Any litigation regarding our proprietary rights could be costly and divert our attention, result in the loss of certain of our proprietary rights, require us to seek licenses from third parties and prevent us from selling its services, any one of which could adversely affect our business. THIRD PARTIES MAY MISAPPROPRIATE OUR PROPRIETARY INFORMATION We may not be able to prevent misappropriation of our proprietary information and that agreements entered into for that purpose may not be enforceable. It might be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization. The laws of some countries may afford us little or no effective protection of its intellectual property. INSIDERS CONTROL A LARGE PERCENTAGE OF OUR STOCK As of March 15, 1999, our directors and executive officers beneficially owned approximately 39.5% of the outstanding Common Stock. As a result, these stockholders, if they act as a group, will have a significant influence on all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such control may have the effect of delaying or preventing a change in control. OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER Provisions in our charter and bylaws may have the effect of delaying or preventing a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others: - the division of the board of directors into three separate classes; - the right of the board to elect a director to fill a space created by the expansion of the board; 27 29 - the authority of the board to issue shares of preferred stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of those shares without further action by stockholders; - the ability of the board to alter our bylaws; and - the limited ability of stockholders to call a special meeting of stockholders. Furthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law. These provisions prohibit certain large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless: - 66 2/3% of the shares of voting stock not owned by this large stockholder approve the merger or combination; or - our board of directors approves the merger or combination or the transaction which resulted in the large stockholder owning 15% or more of our outstanding voting stock. FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 READY COULD NEGATIVELY IMPACT OUR BUSINESS Many currently installed computer systems and software products only accept two digits to identify the year in any date. Thus, the year 2000 will appear as "00", which the system might consider to be the year 1900 rather than the year 2000. This could result in system failures, delays or miscalculations causing disruptions to our operations. With the assistance of an independent consultant, we have evaluated the Year 2000 readiness of the hardware and software utilized in our operations, including non-information technology operations, such as building security, voice mail and other systems. Our evaluation included: - the identification of internally utilized products; - checking of products' Year 2000 readiness; and - assessment of repair or replacement. Based on this assessment, we have determined that there are no material Year 2000 issues within our systems and services. A plan addressing the issues which were identified has been formulated, with implementation scheduled to be completed by the end of 1999. Since third parties developed and currently support many of the systems that we use, a significant part of this effort will be to ensure that these third-party systems are Year 2000 ready. We plan to confirm this readiness through a combination of the representation by these third parties of their products' Year 2000 readiness, as well as specific testing of these systems. The failure of systems maintained by third parties to be Year 2000 ready could cause us to incur significant expense to remedy any problems, reduce our revenues from such third parties or otherwise seriously damage our business. A significant Year 2000-related disruption of the network services or equipment that third-party vendors provide to us could also cause our users to consider seeking alternate providers or cause an unmanageable burden on our technical support. Additionally, we rely upon various governmental agencies, utility companies, telecommunications service companies, delivery service companies and other service providers. There is no assurance that such parties will not suffer a year 2000 business disruption, which could adversely affect our ability to conduct our business. Our failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, some of our normal business activities or operations. 28 30 OUR STOCK PRICE MAY CONTINUE TO BE SUBJECT TO SIGNIFICANT VOLATILITY The trading price of our Common Stock has been and may continue to be subject to wide fluctuations. Trading prices of the Common Stock may fluctuate in response to a number of factors, many of which are beyond our control. In addition, the stock market in general, and the market for Internet-related and technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks are at or near historical highs and reflect price earnings ratios substantially above historical levels. There can be no assurance that these trading prices and price earnings ratios will be sustained. These broad market and industry factors may adversely affect the market price of the Common Stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources. SHARES ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY AFFECT OUR STOCK PRICE As of March 15, 1999, there were outstanding 36,781,981 shares of our Common Stock. As of March 15, 1999, 22,304,362 of these shares were held by existing stockholders as "restricted securities" and will become eligible for sale only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act. Furthermore, at least 6,903,818 shares are issuable upon the exercise of options, subject to vesting, and 436,192 shares are issuable upon the exercise of warrants. Sales of a large number of shares could have an adverse effect on the market price of our common stock. The stockholders have no restrictions on selling any of our securities held by them, other than as provided under applicable securities laws. In addition, certain stockholders can require us to register our securities they own for public sale. Any sales by these stockholders could adversely affect the trading price of our common stock. ITEM 2. PROPERTIES The Company's executive offices are located in Dallas, Texas in a 28,000 square foot facility that we lease at a current monthly rent of $3,920. The lease agreement terminates on February 1, 2002. We have an option to extend the lease agreement for three additional five-year terms. We also lease a 10,000 square foot facility adjacent to our headquarters at a current monthly rent of $4,783. The lease agreement terminates on February 1, 2002. We also lease an office in New York, New York at a current monthly rent of $6,033. This lease expires on January 31, 2001. Our wholly-owned subsidiary, SimpleNet, leases an office in San Diego, California at a current monthly rent of $20,208. The lease agreement terminates on March 31, 2005. We also lease various small sales offices throughout the country on a short-term basis. We do not own any real estate. ITEM 3. LEGAL PROCEEDINGS On or about August 25, 1998, Venson M. Shaw and Steven M. Shaw ("Plaintiffs") filed a lawsuit against the Company and RealNetworks in the United States District Court for the Northern District of Texas Dallas Division, and on or about December 29, 1998, Plaintiffs filed a lawsuit against the Company and Microsoft in the same District. The two lawsuits have been consolidated into one action. In both claims in the consolidated action, Plaintiffs allege that our use of streaming media software products and services directed to media delivery systems infringes on Plaintiffs' patent. The Plaintiffs are seeking to enjoin the Company, RealNetworks and Microsoft from further alleged infringement of their patents and an unspecified amount of monetary damages. Although no assurance can be given as to the outcome of the lawsuit, we believe that the allegations in the action are without merit and intend to vigorously defend against the action and seek its early dismissal. In addition, we believe we are entitled to be indemnified under the terms of our license agreements with RealNetworks and Microsoft for the claims raised by Plaintiffs. No assurances, however, can be given as to the availability of such indemnification at this time or the results of such proceeding. 29 31 From time to time we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of third-party trademarks and other intellectual property rights by us and our licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. We are not aware of any legal proceedings or claims that we believe will, individually or in the aggregate, adversely affect on our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The principal market for our Common Stock is the Nasdaq National Market, on which our Common Stock has been quoted since July 17, 1998, the date of our initial public offering. Prior to that time, there was no public market for our Common Stock. The following table sets forth the high and low reported sales prices for our Common Stock for the periods indicated. All share amounts and prices contained in this report have been adjusted to reflect the two-for-one stock split which was effected on February 11, 1999.
FISCAL QUARTER ENDED HIGH LOW - -------------------- ------ ------ 09/30/98 (beginning 07/17/98)............................... $34.00 $17.38 12/31/98.................................................... 49.38 18.06
As of March 15, 1999, the last reported sales price of our Common Stock was $93.375 per share. As of March 15, 1999, there were 189 holders of record of our Common Stock. DIVIDENDS We have never paid cash dividends. We intend to retain any future earnings for the operation and the expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES On November 30, 1998, we issued 821,618 shares of our Common Stock (the "Acquisition Shares") to the four existing stockholders of SimpleNet in exchange for all of the outstanding shares of the common stock of SimpleNet. No underwriters were involved and there were no underwriting discounts or commissions. We issued the shares of our Common Stock in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act, on the basis that such transaction did not involve any public offering. The stockholders of SimpleNet had access to all relevant information regarding the Company necessary to evaluate the investment; each such stockholder represented that the Acquisition Shares were being acquired for investment only; and each such stockholder was represented by a sophisticated purchasers' representative. There was no general solicitation or advertising involved in the acquisition, and we used reasonable care to ensure that the stockholders of SimpleNet were not underwriters. Other than as described above in connection with our acquisition of SimpleNet, during the period from September 30, 1998 to December 31, 1998, we did not issue or sell securities pursuant to offerings that were not registered under the Securities Act, except for an aggregate of 55,500 shares of Common Stock which we issued to employees upon the exercise of stock options. The aggregate consideration received for these shares was $203,612. We issued the shares in reliance upon the exemption from registration afforded by Rule 701 promulgated under the Securities Act. 30 32 USE OF PROCEEDS Our registration statement (Registration No. 333-52877) under the Securities Act for our initial public offering became effective on July 16, 1998. Offering proceeds, net of our aggregate expenses, were approximately $43.2 million. We have used all of the net offering proceeds for the purchase of temporary investments consisting of cash, cash equivalents and short-term investments. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for the years ended December 31, 1998, 1997 and 1996 and the period from Inception (May 19, 1995) to December 31, 1995. The statement of operations data and the balance sheet data contained in the table below are derived from our Consolidated Financial Statements which have been audited by PricewaterhouseCoopers LLP, our independent accountants. The financial information set forth in the following table should be read in conjunction with, and is qualified in its entirety by, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this report and our Consolidated Financial Statements and Notes to Consolidated Financial Statements which appear beginning on page F-2 of this report.
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION ---------------------------- (MAY 19, 1995) TO 1998 1997 1996 DECEMBER 31, 1995 -------- ------- ------- --------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Business services.......................... $ 13,953 $ 5,338 $ 958 $ -- Advertising................................ 8,419 3,811 1,091 -- -------- ------- ------- ------- Total revenues..................... 22,372 9,149 2,049 -- -------- ------- ------- ------- Operating expenses: Production costs........................... 4,415 2,950 1,301 -- Operating and development.................. 14,955 5,460 1,621 -- Sales and marketing........................ 11,760 4,172 768 21 General and administrative................. 4,518 1,915 841 217 Depreciation and amortization.............. 3,360 1,416 562 30 Merger costs............................... 1,534 -- -- -- -------- ------- ------- ------- Total operating expenses........... 40,542 15,913 5,093 268 -------- ------- ------- ------- Net operating loss................. (18,170) (6,764) (3,044) (268) Interest and other income.................... 1,922 213 76 -- Interest expense............................. (196) (74) (4) -- -------- ------- ------- ------- Net loss before income tax......... (16,444) (6,625) (2,972) (268) Provision for income taxes................... -- 43 25 -- -------- ------- ------- ------- Net loss........................... $(16,444) $(6,668) $(2,997) $ (268) ======== ======= ======= ======= Basic and diluted net loss per share......... $ (0.52) $ (0.28) $ (0.15) $ (0.02) ======== ======= ======= ======= Shares used in the net loss per share calculations............................... 31,911 24,157 19,754 12,040 ======== ======= ======= =======
DECEMBER 31, ---------------------------------- 1998 1997 1996 1995 ------- ------- ------ ----- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................ $49,680 $21,341 $4,583 $ 142 Working capital (deficit)................................ 50,345 23,081 4,392 (75) Total assets............................................. 62,079 29,642 8,287 676 Total debt............................................... -- 754 7 -- Total other liabilities.................................. 4,008 1,850 678 320 Total stockholders' equity (deficit)..................... 58,071 27,038 7,602 (214)
31 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis contains forward-looking statements within the meaning of Federal securities law. You can identify these statements because they use forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue," "believe," "intend," or other similar words. These words, however, are not the exclusive means by which you can identify these statements. You can also identify forward-looking statements because they discuss future expectations, contain projections of results of operations or of financial conditions, characterize future events or circumstances or state other forward-looking information. We have based all forward-looking statements included in Management's Discussion and Analysis on information currently available to us, and we assume no obligation to update any such forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, actual results could differ materially from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, among others: - our limited operating history; - our dependence on third party providers of content; - our dependence on the acceptance of streaming media technology; - our dependence on the continuing acceptance of the Internet as an advertising medium; - our potential inability to manage our growth; and - intense competition for Internet broadcasting and services; In evaluating our business, investors should carefully consider the information set forth above in "Item 1A. Company Risk Factors." We caution investors that our business and financial performance are subject to substantial risks and uncertainties. The following Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements which appear in this report beginning on page F-2. INTRODUCTION In Management's Discussion and Analysis, we explain the general financial condition and the results of operations for broadcast.com and its subsidiaries including: - what factors affect our business; - what our revenues and costs were in 1998, 1997 and 1996; - why those revenues and costs were different from the year before; - where our revenues came from; - how all of the above affects our overall financial condition; and - where cash will come from to provide working capital and to pay for future capital expenditures. As you read Management's Discussion and Analysis, it may be helpful to refer to our Consolidated Statements of Operations, which appear on page F-4 of this report and which present the results of our operations for 1998, 1997 and 1996. In Management's Discussion and Analysis, we analyze and explain the annual changes in the specific line items contained in the Consolidated Statements of Operations. Our analysis may be important to you in making decisions about your investments in broadcast.com. 32 34 OVERVIEW From our inception on May 19, 1995 through December 31, 1995, we had no revenues and our operating activities consisted primarily of investing in necessary network infrastructure and in the initial planning and development of our Web sites and operations. During 1996, we generated revenues from business services and advertising. Our operating activities were primarily as follows: - we continued to develop the network infrastructure required for large-scale streaming media broadcasts; - we continued to enhance our Web sites; and - we opened a sales office in New York. During 1997, we significantly increased revenues from business services and advertising. In addition, we began generating revenues from the sale of ad spots received from radio stations in exchange for broadcasting their programming over the Internet. Our operating activities were primarily as follows: - we continued to expand our network infrastructure; - we moved to a 28,000 square foot facility in Dallas, Texas; - we continued to enhance our Web sites; and - we added qualified personnel for sales, marketing, operations and general and administrative. In 1998, we added television advertising sales to our advertising revenues. Our operating activities were primarily as follows: - we continued to enhance our Web sites; - we expanded our customer and user base; - we hired regional sales managers and vice presidents; - we expanded our sales force into Los Angeles, San Francisco, Houston, Austin, Seattle, Toronto and Washington, D.C.; - we continued to expand our network infrastructure; and - we continued to expend significant resources as we further aggregated content by obtaining Internet broadcasting rights to audio and video programming. We also completed our acquisition of Simple Network Communications, a provider of inexpensive Web-site hosting services to consumers and small businesses. Sales of business services and advertising are the main sources of our revenues. Included in business services revenues are fees for broadcasting live and on-demand events as well as hosting services. Also included are the cash payments the Company receives from radio and television stations in exchange for the Company broadcasting their programming over the Internet. We recognize business services revenues in the month in which we are to perform the service, provided that we have no significant obligations remaining and collection of the resulting receivable is probable. We derive advertising revenues by selling gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads, as well as by selling ad spots received from radio and television stations in exchange for broadcasting their programming over the Internet and by selling prepaid advertising. We recognize advertising revenues in the period in which we display the advertisement on one of our Web pages, except for sponsorship sales, which we recognize ratably over the term of the sponsorship, provided that we have no significant obligations remaining and collection of the resulting receivable is probable. 33 35 We have incurred significant losses since inception and, as of December 31, 1998, had an accumulated deficit of approximately $26.4 million. We believe that our success will depend largely on our ability to extend our leadership position as a leading source for streaming media programming and business services on the Web. Accordingly, we intend to invest heavily in order to: - enhance our sales and marketing; - acquire content; and - continue our development of our network infrastructure. We expect to continue to incur substantial operating losses for the foreseeable future. In view of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of our revenues and operating results, including operating expenses as a percentage of total net revenues, are not necessarily meaningful and should not be relied upon as indications of future performance. Although we have experienced sequential quarterly growth in revenues, we do not believe that our historical growth rates are necessarily sustainable or indicative of future growth. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 Revenues Our total revenues increased $13.2 million, or 144.5%, to $22.4 million in 1998 from $9.1 million in 1997. Business Services. Our business services revenues increased $8.6 million, to $14.0 million in 1998 from $5.3 million in 1997. Business services revenues represented 62.4% of total revenues in 1998 and 58.3% of total revenues in 1997. The increase in our business services revenues was due primarily to (i) an increase in the number of business services events we broadcast to 1,643 events in 1998 from 740 events in 1997 and (ii) an increase in the number of customer Web sites hosted by SimpleNet. Advertising. Our advertising revenues increased $4.6 million, to $8.4 million in 1998 from $3.8 million in 1997. Advertising revenues represented 37.6% of total revenues in 1998 and 41.7% of total revenues in 1997. Our bartered Web advertising revenues increased $153,000, or 15.0%, to $1.2 million in 1998 from $1.0 million in 1997, and represented 5.2% of total revenues in 1998 and 11.1% of total revenues in 1997. The increase in our advertising revenues was due primarily to an increase in ads we sold to existing and new advertisers on our Web sites, including gateway ads, which we began selling in the first quarter of 1997 and increased sales of ad spots we acquired by licensing additional radio and television stations. Operating Expenses Production Costs. Our production costs increased $1.5 million, or 49.7%, to $4.4 million in 1998 from $3.0 million in 1997. These expenses increased primarily because of increased production costs necessitated as we broadcast additional business services events; increased royalty license fees; sales of prepaid advertising credits; and increased bartered Web advertising expenses. Excluding both the revenues and expenses associated with bartered Web advertising transactions, our production costs decreased to 15.3% of total revenues in 1998 from 23.8% of total revenues in 1997. Operating and Development. Our operating and development expenses increased $9.5 million, to $15.0 million in 1998 from $5.5 million in 1997. The increase was due primarily to expenditures for (i) data communications as user traffic increased, (ii) operations personnel to handle additional broadcasts of our additional content, (iii) software license fees as our network infrastructure expanded and (iv) content license fees in order to acquire additional content. As our user traffic increases and as the number of business services events we produce increases, we expect these expenditures to increase. 34 36 Sales and Marketing. Our sales and marketing expenses increased $7.6 million, to $11.8 million in 1998 from $4.2 million in 1997. The increase was due primarily to growth in our sales force and marketing staff and increased advertising expenses. General and Administrative. Our general and administrative expenses increased $2.6 million, to $4.5 million in 1998 from $1.9 million in 1997. The increase was due primarily to increases in expenses necessary to support our growth such as increased personnel expenses, increased professional fees and increased building expenses. Depreciation and Amortization. Our depreciation and amortization expenses increased $1.9 million, to $3.4 million in 1998 from $1.4 million in 1997. These expenses increased primarily because we added property and equipment as we expanded our network infrastructure, incurred leasehold improvement costs and purchased equipment necessary to support the growth in our personnel. Merger Costs. In 1998, we incurred $1.5 million in merger costs related to our acquisition of SimpleNet. These costs consisted primarily of legal and accounting fees, underwriting commissions and certain other expenses directly related to the acquisition. Interest and Other Income Interest and other income consists primarily of interest earnings on our cash and cash equivalents. Interest and other income increased approximately $1.7 million, to $1.9 million in 1998 from $213,000 in 1997. The increase was due primarily to interest we earned from the investment of higher cash and cash equivalent balances which were derived from sales of Common Stock in December 1997 and our initial public offering in July 1998. Interest Expense Our interest expense increased $122,000, to $196,000 in 1998 from $74,000 in 1997. The increase was due to interest related to additional capital leases we entered into during 1998, which were paid off in December 1998. Provision For Income Taxes Provision for income taxes was $0 in 1998 compared to $43,000 in 1997 as our subsidiary incurred taxable income during 1997. YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 Revenues Our total revenues increased $7.1 million, or 346.5%, to $9.1 million in 1997 from $2.0 million in 1996. Business Services. Our business services revenues increased $4.4 million, to $5.3 million in 1997 from $958,000 in 1996. Business services revenues represented 58.3% of total revenues in 1997 and 46.8% of total revenues in 1996. The increase in business services revenues was due primarily to (i) an increase in the number of business services events we broadcast to 740 events in 1997 from 238 events in 1996 and (ii) an increase in the number of customer Web sites hosted by SimpleNet. Advertising. Our advertising revenues increased $2.7 million, to $3.8 million in 1997 from $1.1 million in 1996. Advertising revenues represented 41.7% of total revenues in 1997 and 53.2% of total revenues in 1996. Our bartered Web advertising revenues increased $379,000, or 59.4%, to $1.0 million in 1997 from $638,000 in 1996, and represented 11.1% of total revenues in 1997 and 31.1% of total revenues in 1996. The increase in our advertising revenues was due primarily to an increase in ads we sold to existing and new advertisers on our Web sites, including gateway ads, which we began selling in the first quarter of 1997 and increased sales of ad spots we acquired by licensing additional radio and television stations. 35 37 Operating Expenses Production Costs. Our production costs increased $1.6 million, or 126.7%, to $2.9 million in 1997 from $1.3 million in 1996. These expenses increased primarily because of increases in sales of prepaid advertising credits, bartered Web advertising expenses and production and personnel costs required to broadcast additional business services events. Excluding both the revenues and expenses associated with bartered Web advertising transactions, our production costs decreased to 23.8% of total revenues in 1997 from 47.0% of total revenues in 1996. Operating and Development. Our operating and development expenses increased $3.8 million, to $5.4 million in 1997 from $1.6 million in 1996. The increase primarily resulted from expenditures for (i) data communications as user traffic increased, (ii) operations personnel to handle additional broadcasts we made of additional content and (iii) content license fees in order to acquire additional content. Sales and Marketing. Our sales and marketing expenses increased $3.4 million, to $4.2 million in 1997 from $768,000 in 1996. The increase was due primarily to growth in our sales force and marketing staff. General and Administrative. Our general and administrative expenses increased $1.1 million, to $1.9 million in 1997 from $841,000 in 1996. These expenses increased because of increases in expenses necessary to support our growth such as personnel expenses, professional fees and building expenses. Depreciation and Amortization. Our depreciation and amortization expenses increased $854,000, to $1.4 million in 1997 from $562,000 in 1996. These expenses increased primarily because we added property and equipment as we expanded our network infrastructure, incurred leasehold improvement costs and purchased equipment necessary to support the growth in personnel. Interest and Other Income Interest and other income increased $137,000, to $213,000 in 1997 from $76,000 in 1996 due to interest earned on higher cash and cash equivalent balances. Interest Expense Our interest expense increased $70,000, to $74,000 in 1997 from $4,000 in 1996. The increase was due to interest related to additional capital leases we entered into during 1997. Provision For Income Taxes Provision for income taxes was $43,000 in 1997 compared to $25,000 in 1996 as our subsidiary had higher taxable income in 1997. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through sales of Common Stock and warrants. Net proceeds from these sales from inception to December 31, 1998 have totaled approximately $84.3 million. At December 31, 1998, our principal source of liquidity was approximately $49.7 million of cash and cash equivalents. In April 1998, we entered into an operating lease facility which provides for up to $2.5 million for equipment leasing, of which we have utilized approximately $814,000 as of December 31, 1998. In addition, in December 1997 we entered into a line of credit which allows us to borrow up to $2.5 million for working capital needs and equipment purchases. The line of credit expired in 1998. We used net cash in our operating activities equaling $11.6 million in 1998; $5.9 million in 1997; and $4.2 million in 1996. The net cash we used in our operating activities in 1998, 1997 and 1996 was primarily attributable to net losses, offset in part by increases in accounts payable, accrued liabilities and deferred revenue. 36 38 We used net cash in our investing activities equaling: $6.0 million in 1998; $3.2 million in 1997; and $1.4 million in 1996. The net cash we used in our investing activities in 1998, 1997 and 1996 was related primarily to purchases of property and equipment. Our financing activities provided net cash equaling $46.0 million in 1998; $25.9 million in 1997; and $10.0 million in 1996. The net cash provided by our financing activities resulted primarily from sales of Common Stock. In July 1998, we completed a public offering of 5,375,000 shares of Common Stock resulting in net proceeds of approximately $43.2 million. We believe that current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months. However, we may need to raise additional funds through public or private financings or other arrangements. We can make no assurance that we will able to obtain such additional financings, if needed, on terms attractive to us, if at all. Failure to raise capital when needed could adversely affect our business. If we raise additional funds through the issuance of equity securities, then-current broadcast.com stockholders would have their percentages of ownership of broadcast.com reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to those of Common Stock. YEAR 2000 COMPUTER SYSTEMS AND SOFTWARE PRODUCTS READINESS Many currently installed computer systems and software products only accept two digits to identify the year in any date. Thus, the year 2000 will appear as "00", which the system might consider to be the year 1900 rather than the year 2000. This could result in system failures, delays or miscalculations causing disruptions to our operations. With the assistance of an independent consultant, we have evaluated the Year 2000 readiness of the hardware and software utilized in our operations, including non-information technology operations, such as building security, voice mail and other systems. Our evaluation included: - the identification of internally utilized products; - checking of products' Year 2000 readiness; and - assessment of repair or replacement. Based on this assessment, we have determined that there are no material Year 2000 issues within our systems and services. A plan addressing the issues which were identified has been formulated, with implementation scheduled to be completed by the end of 1999. Since third parties developed and currently support many of the systems that we use, a significant part of this effort will be to ensure that these third-party systems are Year 2000 ready. We plan to confirm this compliance through a combination of the representation by these third parties of their products' Year 2000 readiness, as well as specific testing of these systems. The failure of systems maintained by third parties to be Year 2000 ready could cause us to incur significant expense to remedy any problems, reduce our revenues from such third parties or otherwise seriously damage our business. A significant Year 2000-related disruption of the network services or equipment that third-party vendors provide to us could also cause our users to consider seeking alternate providers or cause an unmanageable burden on our technical support. Additionally, we rely upon various governmental agencies, utility companies, telecommunications service companies, delivery service companies and other service providers. There is no assurance that such parties will not suffer a year 2000 business disruption, which could adversely affect our ability to conduct our business. Our failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, some of our normal business activities or operations. 37 39 NET OPERATING LOSS CARRYFORWARDS As of December 31, 1998, we had available net operating loss carryforwards totaling approximately $28.3 million, which expire beginning in 2011. Under the Tax Reform Act of 1986, our use of net operating loss carryforwards may be subject to limitations triggered by ownership changes which may have occurred or could occur in the future or limitations imposed by the separate return limitation year rules. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Index of Consolidated Financial Statements which appears on page F-1 of this report. The Report of Independent Accountants, Consolidated Financial Statements and Notes to Consolidated Financial Statements which are listed in the Index of Consolidated Financial Statements and which appear beginning on page F-2 of this report are incorporated into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is included in the sections entitled "Management--Directors," "Management--Executive Officers," "Management--Section 16(a) Beneficial Ownership Reporting Compliance" and "Item 1--Election of Directors" contained in our Definitive Proxy Statement which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the 1998 fiscal year and is incorporated by reference into this Item 10. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included in the section entitled "Executive Compensation" contained in our Definitive Proxy Statement which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the 1998 fiscal year and is incorporated by reference into this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included in the section entitled "Security Ownership of Certain Beneficial Owners and Management" contained in our Definitive Proxy Statement which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the 1998 fiscal year and is incorporated by reference into this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included in the section entitled "Management--Certain Transactions" contained in our Definitive Proxy Statement which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the 1998 fiscal year and is incorporated by reference into this Item 13. 38 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14(A)(1) FINANCIAL STATEMENTS Please see the accompanying Index to Consolidated Financial Statements which appears on page F-1 of this report. The Report of Independent Accountants, Consolidated Financial Statements and Notes to Consolidated Financial Statements which are listed in the Index to Consolidated Financial Statements and which appear beginning on page F-2 of this report are included in Item 8 above. 14(A)(2) FINANCIAL STATEMENT SCHEDULES
PAGE IN THIS REPORT ------------------- Schedule II -- Valuation and Qualifying Accounts............ S-2
We have omitted all other financial statements and schedules not listed because they are not required or the information is given elsewhere in the Consolidated Financial Statements. We have omitted the financial statements of unconsolidated subsidiaries because, considered in the aggregate, they would not constitute a significant subsidiary. 14(A)(3) EXHIBITS Please see the accompanying Index to Exhibits. We will furnish to any stockholder, upon written request, any exhibit listed in the accompanying Index to Exhibits upon payment by such stockholder of our reasonable expenses in furnishing any such exhibit. Requests should be directed to Belinda Johnson, Secretary, broadcast.com inc., 2914 Taylor Street, Dallas, Texas 75226. 14(B) REPORTS ON FORM 8-K During the last quarter of 1998, we filed Current Reports on Form 8-K dated November 20, 1998 and December 15, 1998. 39 41 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on March 30, 1999. broadcast.com inc. By: /s/ TODD R. WAGNER ---------------------------------- Name: Todd R. Wagner Title: Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Todd R. Wagner and Jack A. Riggs and each of them, his true and lawful attorneys-in-fact and agents, with full power and substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacity indicated on March 30, 1999.
SIGNATURE TITLE --------- ----- /s/ TODD R. WAGNER Chief Executive Officer (Principal Executive - ----------------------------------------------------- Officer) and Vice Chairman of the Board Todd R. Wagner /s/ MARK CUBAN Chairman of the Board and President - ----------------------------------------------------- Mark Cuban /s/ STEVEN D. LEEKE Director - ----------------------------------------------------- Steven D. Leeke /s/ JOSEPH W. AUTEM Director - ----------------------------------------------------- Joseph W. Autem /s/ JACK A. RIGGS Chief Financial Officer (Principal Financial - ----------------------------------------------------- Officer and Principal Accounting Officer) Jack A. Riggs and Director
40 42 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of broadcast.com inc. Our audits of the consolidated financial statements referred to in our report dated January 27, 1999, except as to Notes 3 and 11, which are as of March 15, 1999, appearing in broadcast.com inc.'s 1998 Annual Report on Form 10-K also included an audit of the Financial Statement Schedule for each of the three years in the period ended December 31, 1998, listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Dallas, Texas January 27, 1999 S-1 43 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS PERIOD ----------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Year ended December 31, 1996 Allowance for doubtful accounts.................. $ -- $ 84 $ (49) $ 35 Allowance against deferred tax asset............. 101 1,116 -- 1,217 ------ ------ ----- ------- Total.................................... 101 1,200 (49) 1,252 ====== ====== ===== ======= Year ended December 31, 1997 Allowance for doubtful accounts.................. 35 86 (45) 76 Allowance against deferred tax asset............. 1,217 2,483 -- 3,700 ------ ------ ----- ------- Total.................................... 1,252 2,569 (45) 3,776 ====== ====== ===== ======= Year ended December 31, 1998 Allowance for doubtful accounts.................. 76 642 (479) 239 Allowance against deferred tax asset............. 3,700 6,559 -- 10,259 ------ ------ ----- ------- Total.................................... $3,776 $7,201 $(479) $10,498 ====== ====== ===== =======
S-2 44 BROADCAST.COM INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements referred to below are as of December 31, 1998, and 1997 and for the years ended December 31, 1998, 1997 and 1996.
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 45 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of broadcast.com inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of broadcast.com inc. and its subsidiaries, at December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principals used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Dallas, Texas January 27, 1999, except as to Notes 3 and 11 which are as of March 15, 1999 F-2 46 BROADCAST.COM INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS
DECEMBER 31, ------------------ 1998 1997 -------- ------- Current assets: Cash and cash equivalents................................. $ 49,680 $21,341 Accounts receivable, net of allowance of $239 and $76, respectively........................................... 4,244 1,977 Prepaid expenses.......................................... 429 1,995 -------- ------- Total current assets.............................. 54,353 25,313 Property and equipment, net................................. 6,676 4,071 Intangible assets, net...................................... 850 127 Other....................................................... 200 131 -------- ------- Total assets...................................... $ 62,079 $29,642 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Currents liabilities: Accounts payable.......................................... $ 1,006 $ 832 Accrued liabilities....................................... 1,867 663 Deferred revenue.......................................... 1,135 355 Capital lease obligations, current portion................ -- 382 -------- ------- Total current liabilities......................... 4,008 2,232 Capital lease obligations, less current portion............. -- 372 Commitments and contingencies (Note 6) Stockholders' equity: Preferred stock, 5,000,000 shares authorized, par $.01, none issued and outstanding............................ -- -- Common stock, 60,000,000 shares authorized, par $.01, 35,054,780 and 28,749,540 shares issued and outstanding, respectively.............................. 243 180 Additional paid-in capital................................ 84,592 36,746 Common stock subscribed................................... -- 45 Deferred compensation..................................... (387) -- Accumulated deficit....................................... (26,377) (9,933) -------- ------- Total stockholders' equity........................ 58,071 27,038 -------- ------- Total liabilities and stockholders' equity........ $ 62,079 $29,642 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 47 BROADCAST.COM INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 -------- ------- ------- Revenues: Business services......................................... $ 13,953 $ 5,338 $ 958 Advertising............................................... 8,419 3,811 1,091 -------- ------- ------- Total revenues.................................... 22,372 9,149 2,049 -------- ------- ------- Operating expenses: Production costs.......................................... 4,415 2,950 1,301 Operating and development................................. 14,955 5,460 1,621 Sales and marketing....................................... 11,760 4,172 768 General and administration................................ 4,518 1,915 841 Depreciation and amortization............................. 3,360 1,416 562 Merger costs.............................................. 1,534 -- -- -------- ------- ------- Total operating expenses.......................... 40,542 15,913 5,093 -------- ------- ------- Net operating loss................................ (18,170) (6,764) (3,044) Interest and other income................................... 1,922 213 76 Interest expense............................................ (196) (74) (4) -------- ------- ------- Loss before income tax provision.......................... (16,444) (6,625) (2,972) Provision for income taxes.................................. -- 43 25 -------- ------- ------- Net loss.......................................... $(16,444) $(6,668) $(2,997) ======== ======= ======= Basic and diluted net loss per share........................ $ (0.52) $ (0.28) $ (0.15) ======== ======= ======= Shares used in the net loss per share calculations.......... 31,911 24,157 19,754 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 48 BROADCAST.COM INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
TOTAL COMMON STOCK ADDITIONAL COMMON STOCKHOLDERS' --------------- PAID-IN STOCK DEFERRED ACCUMULATED EQUITY SHARES AMOUNT CAPITAL SUBSCRIBED COMPENSATION DEFICIT (DEFICIT) ------ ------ ---------- ---------- ------------ ----------- ------------- Balance at December 31, 1995....................... 12,060 $ 13 $ 40 $ -- $ -- $ (268) $ (215) Issuance of Common Stock... 11,005 110 10,703 -- -- -- 10,813 Net loss................... -- -- -- -- -- (2,997) (2,997) ------ ---- ------- ---- ----- -------- -------- Balance at December 31, 1996....................... 23,065 123 10,743 -- -- (3,265) 7,601 Issuance of Common Stock... 5,685 57 25,283 -- -- -- 25,340 Common Stock subscribed.... -- -- -- 45 -- -- 45 Issuance of warrants....... -- -- 720 -- -- -- 720 Net loss................... -- -- -- -- -- (6,668) (6,668) ------ ---- ------- ---- ----- -------- -------- Balance at December 31, 1997....................... 28,750 180 36,746 45 -- (9,933) 27,038 Issuance of Common Stock... 839 8 3,875 (45) -- -- 3,838 Exercise of stock options and warrants............. 91 1 322 -- -- -- 323 Issuance of compensatory stock options............ -- -- 461 -- (387) -- 74 Issuance of stock in public offering, net............ 5,375 54 43,188 -- -- -- 43,242 Net loss................... -- -- -- -- -- (16,444) (16,444) ------ ---- ------- ---- ----- -------- -------- Balance at December 31, 1998....................... 35,055 $243 $84,592 $ -- $(387) $(26,377) $ 58,071 ====== ==== ======= ==== ===== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 49 BROADCAST.COM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 -------- ------- ------- Cash flows from operating activities: Net loss.................................................. $(16,444) $(6,668) $(2,997) Adjustments to reconcile net loss to net cash from operating activities: Depreciation........................................... 3,274 1,347 506 Amortization........................................... 86 69 56 Recognition of deferred compensation expense........... 74 45 -- Provision for doubtful accounts........................ 482 86 84 Changes in operating assets and liabilities: Accounts receivable.................................. (2,749) (1,656) (491) Prepaid expenses..................................... 1,566 (227) (1,695) Other assets......................................... (69) (112) (8) Accounts payable..................................... 175 701 (175) Accrued liabilities.................................. 1,203 174 491 Deferred revenue..................................... 781 297 57 -------- ------- ------- Net cash used in operating activities............. (11,621) (5,944) (4,172) -------- ------- ------- Cash flows from investing activities: Purchases of business and other intangible assets......... (875) -- -- Purchases of property and equipment....................... (5,121) (3,190) (1,415) -------- ------- ------- Net cash used in investing activities............. (5,996) (3,190) (1,415) -------- ------- ------- Cash flows from financing activities: Proceeds from common stock issuances...................... 47,080 25,340 10,049 Proceeds from exercise of warrants and options............ 323 720 -- Proceeds from notes payable............................... 750 -- -- Payment on notes payable.................................. (750) -- -- Payments on capital lease obligations..................... (1,447) (161) -- Payments on stockholder loans............................. -- (7) (25) Proceeds from stockholder loans........................... -- -- 4 Purchase of treasury stock................................ -- -- (160) Proceeds from sale of treasury stock...................... -- -- 160 -------- ------- ------- Net cash provided by financing activities......... 45,956 25,892 10,028 -------- ------- ------- Net increase in cash and cash equivalents................... 28,339 16,758 4,441 Cash and cash equivalents at beginning of period............ 21,341 4,583 142 -------- ------- ------- Cash and cash equivalents at end of period.................. $ 49,680 $21,341 $ 4,583 ======== ======= =======
(See disclosure of noncash transactions in Note 2.) The accompanying notes are an integral part of these consolidated financial statements. F-6 50 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Cameron Audio Networks, Inc. ("Cameron") was incorporated and filed its Articles of Incorporation (the "Articles") with the Secretary of State of Texas on May 19, 1995. On May 15, 1996, Cameron purchased the rights to the name AudioNet and subsequently filed a Certificate of Incorporation to form AudioNet, Inc. ("AudioNet"), a new entity, in the state of Delaware, on September 19, 1996. On November 1, 1996, Cameron and AudioNet filed a Certificate of Merger, effectively a stock-for-stock merger, whereby Cameron merged with and into AudioNet, with AudioNet continuing as the surviving entity. Each share of Common Stock of Cameron was converted to one share of Common Stock of AudioNet, and Cameron ceased to exist at the date of such merger. Effective as of the date of the merger, the Common Stock of the Company was changed from no par value to par value of $0.01. The financial statements have been retroactively restated to reflect this reincorporation, except for the original issuance of founders' shares. Effective May 1998, the Company changed its name to broadcast.com inc. ("broadcast.com" or the "Company"). On November 30, 1998, the Company acquired all of the outstanding capital stock of Simple Network Communications, Inc. ("SimpleNet"), a provider of inexpensive web-site hosting services to consumers and small businesses, pursuant to an Agreement and Plan of Reorganization, dated as of November 16, 1998 (the "Merger Agreement"), by and among the Company, SN Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, and SimpleNet. In accordance with the terms of the Merger Agreement, SN Acquisition merged with and into SimpleNet, with SimpleNet as the surviving corporation (the "Merger"). All financial results include the Merger, which was accounted for as a pooling of interests (see Note 4). The Company aggregates content and is a broadcaster of streaming media programming on the Web with the network infrastructure and expertise to deliver or "stream" live and on-demand audio and video content on the Internet. The Company offers a comprehensive selection of live and on-demand audio and video programming on the Internet, including sports, talk and music radio, television, business events, full-length music CDs, news, commentary and full-length audio-books. The Company broadcasts on the Internet 24 hours a day seven days a week, and its programming includes radio stations, television stations and cable networks and game broadcasts and other programming for college and professional sports teams. The Company licenses such programming from content providers, in most cases under exclusive, multi-year agreements. The Company's Business Services Group also provides Internet and intranet broadcasting services to businesses and other organizations. These business services include turnkey production of press conferences, earnings conference calls, stockholder meetings, product introductions, training sessions, distance learning telecourses and media events. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in the consolidation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 51 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) REVENUES The Company generates revenues through business services and advertising. Services paid for in advance are recorded as deferred revenue. Business Services. In 1998, 1997 and 1996, the Company derived 62%, 58% and 47%, respectively, of revenues from business services. Included in business services revenues are fees for broadcasting live and on-demand events as well as hosting services. Also included are the cash payments the Company receives from radio and television stations in exchange for the Company broadcasting their programming over the Internet. Business services revenues are recognized in the month in which the service is performed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Advertising. In 1998, 1997 and 1996, the Company derived 38%, 42% and 53%, respectively, of its revenues from the sale of advertisements. Included in advertising revenues are fees for Web advertising and also the sale of ad spots received from radio and television stations in exchange for the Company broadcasting their programming over the Internet. Bartered Web advertising revenues are derived from transactions in which the Company trades advertising on its Web sites in exchange for advertisements on the Web sites of other companies. Bartered Web advertising revenues are recognized at the fair market value of consideration received or provided, whichever is lower. If a barter agreement extends over the end of any accounting period, an asset and a liability are each recorded related to the fair value of the prepaid advertising expense and for advertisement obligations remaining at such period end. Because historically all bartered Web advertising agreements have been for periods not exceeding 30 days, all bartered Web advertising revenues are offset by an equal amount of bartered Web advertising expense in production costs. Bartered Web advertising revenues, which were $1.2 million in 1998, $1.0 million in 1997 and $638,000 in 1996, represented 14%, 27% and 59% of advertising revenues, or 5%, 11% and 31% of total revenues in 1998, 1997 and 1996, respectively. The corresponding expenses recorded for bartered Web advertising were $1.2 million, $1.0 million and $638,000 in 1998, 1997 and 1996, respectively. Advertising revenues are recognized in the period in which the advertisement is displayed on one of the Company's Web pages, except for sponsorship sales, which are recognized ratably over the term of the sponsorship, provided that no significant Company obligations remain and collection of the resulting receivable is probable. The duration of the Company's advertising commitments has generally ranged from one week to one year. In 1998 and 1997, no customer accounted for more than 10% of revenues. In 1996, two customers of the Company each accounted for 10% of revenues, one of which is currently a stockholder. PRODUCTION COSTS Production costs consist primarily of event production costs, bartered Web advertising expenses, expenses from the sale of prepaid advertising credits, direct personnel expenses associated with event production and performance license fees. OPERATING AND DEVELOPMENT EXPENSES Operating and development expenses consist primarily of data communications expenses, personnel expenses associated with broadcasting, software and content license fees, operating supplies and overhead. SALES AND MARKETING EXPENSES Sales and marketing expenses consist primarily of personnel expenses associated with the sale of the Company's business services and advertising, marketing of the Company's Web sites, related travel expenses and overhead. F-8 52 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses consist primarily of administrative personnel expenses, professional fees, expenditures for applicable facilities costs and overhead. NET LOSS PER SHARE Basic net loss per share has been computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("FAS 128") using the weighted average number of common shares outstanding. The provisions and disclosure requirements for FAS 128 were required to be adopted for interim and annual periods ending after December 15, 1997, with restatement of EPS for all prior periods. Diluted net loss per share gives effect to all dilutive potential common shares that were outstanding during the period. The Company had a net loss for all periods presented herein; therefore, none of the options and warrants outstanding during each of the periods presented, as discussed in Note 8, were included in the computations of diluted earnings per share because they were antidilutive. See Note 8 for a list of options and warrants outstanding at December 31, 1998, 1997 and 1996 that were excluded from the diluted EPS computation because they were antidilutive. CASH EQUIVALENTS The Company considers investments with original maturity dates of 90 days or less to be cash equivalents. The carrying values of these investments are approximately equal to their fair market values at the end of the year. ADVERTISING EXPENSES Advertising expenses are either charged to operations when incurred or purchased in advance and capitalized for future use or sale and expensed as the advertising credits are used or sold. The cost of advertising used by the Company is charged to operations while the cost of advertising sold to customers is included in production costs. PREPAID EXPENSES In December 1997, the Company entered into an agreement with Yahoo! Inc. ("Yahoo!"), an existing stockholder, to integrate their services and conduct certain joint marketing activities. Amounts paid under this agreement for prepaid advertising credits are capitalized and expensed as the advertising credits are utilized. Amounts paid under this agreement for the use, reproduction and display of the broadcast.com brand, page views received from Yahoo! for banner advertising, sponsorships and promotions for the Company are capitalized and expensed ratably over the term of the agreement, which terminated on January 31, 1999. In conjunction with a stock transaction with Premiere Radio Networks, Inc. ("Premiere"), the Company entered into an agreement in November 1996 to pay Premiere $2,000,000 in exchange for an equal value of advertising credits. The Company is required to utilize a minimum of $250,000 in each twelve-month period over a maximum of four years. The asset has been and will continue to be expensed in the period the advertising credits are utilized (see Advertising expenses). In 1998, 1997 and 1996, the Company utilized approximately $935,000, $780,000 and $285,000, respectively, in advertising credits. Prepaid advertising credits that will be utilized within the next twelve months are classified as current assets. F-9 53 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is stated at cost and is depreciated over its estimated useful life, ranging from one to five years. The Company provides for depreciation of assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Prior to 1996, capitalized software costs were being amortized over three years. However, in 1996, the Company changed the estimated life of all capitalized software costs to one year. The effect of this change was to increase the net loss during 1996 by approximately $240,000, or $0.01 per share. Leasehold improvements are amortized over the life of the lease using the straight-line method. Expenditures for maintenance and repairs are charged to operations in the period they are incurred. Long-lived assets held and used by the Company, or to be disposed of, are reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between net book value of the assets and the estimated fair value of the related assets. Based on its most recent analysis, the Company believes that no impairment of long-lived assets existed at December 31, 1998. INTANGIBLE ASSETS Intangible assets consist of certain transmission and digital programming distribution rights acquired under license agreements that are accounted for as a purchase of rights by the Company, as well as the excess of costs over net assets acquired and certain non-compete agreements related to the Merger. Assets and related liabilities associated with license agreements are reported at cost when the license period begins and the program material is available for distribution. Intangible assets are reported at the lower of unamortized cost or estimated net realizable value based on management's expectation of the assets' usefulness and are amortized on a straight-line basis over the asset's estimated useful life. In January 1996, the Company entered into an agreement to purchase a license from Universal Sports in exchange for 780,120 shares of Common Stock. The license provides the Company with the right to broadcast several college and university sports programs over the Internet. The license is stated at an historical cost of $195,000, less accumulated amortization of approximately $117,000 and $78,000 at December 31, 1998 and 1997, respectively, and is being amortized on a straight-line basis over a five-year period. FINANCIAL INSTRUMENTS As of December 31, 1998 and 1997, the fair values of the Company's accounts receivable and accounts payable and accrued liabilities approximate the related carrying values. ACCRUED LIABILITIES At December 31, 1998, accrued liabilities included approximately $429,000 in software license fees, approximately $412,000 in content license fees and approximately $300,000 in sales commissions payable. At December 31, 1997, accrued liabilities included approximately $368,000 in software license fees. INCOME TAXES The Company presents income taxes pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). FAS 109 uses an asset and liability approach to account for income taxes, wherein deferred taxes are provided for book and tax basis differences for assets and liabilities. In the event differences between the financial reporting basis and the tax basis of the Company's assets and F-10 54 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for a portion or all of the deferred tax assets when there is sufficient uncertainty regarding the Company's ability to recognize the benefits of the assets in future years. ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the fair market value of the Company's Common Stock at the date of grant over the amount the employee must pay to acquire the stock. Pro forma disclosure of net loss based on the provisions of FAS 123 is discussed in Note 8. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"), was issued and is effective for fiscal years beginning after June 15, 1999. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company believes that adoption of the standard will not have a material impact on the Company's consolidated results of operations or financial position. In April 1998, Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5"), was issued and is effective for fiscal years beginning after December 15, 1998. SOP 98-5 provides guidance on the financial reporting of start-up and organization costs and requires that these costs be expensed as incurred. The Company believes that the adoption of this standard will not have a material impact on the Company's consolidated results of operations or financial position. In March 1998, Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"), was issued and is effective for fiscal years beginning after December 15, 1998. SOP 98-1 provides guidelines for companies to capitalize or expense costs incurred to develop or obtain internal use software. The Company believes that the adoption of this standard will not have a material impact on the Company's consolidated results of operations or financial position. In June 1997, Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("FAS 131"), was issued and was adopted by the Company in the first quarter of fiscal 1998. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. As the Company operates and management monitors the results in only one operating segment, there are no additional disclosure requirements involved with the Company's adoption of this Statement. In June 1997, Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130"), was issued and was adopted by the Company in the first quarter of fiscal 1998. This Statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses). Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Such items may include foreign currency translation adjustments, F-11 55 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) unrealized gains/losses from investing and hedging activities, and other transactions. As the Company has no components of other comprehensive income for the years ended December 31, 1998, 1997 and 1996, there are no disclosure requirements currently required in the Company's financial statements as a result of the adoption of this statement. RECLASSIFICATIONS Certain reclassifications have been made for consistent presentation. 3. STOCK SPLITS A two-for-one split of the Company's Common Stock was effected in the form of a stock dividend in February 1999. All references in the financial statements to shares, share prices, per share amounts and stock plans have been adjusted retroactively for the two-for-one stock split. A sixty-for-one split of the Company's Common Stock was effected in the form of a stock dividend in April 1997. All references in the financial statements to shares, share prices, per share amounts and stock plans have been adjusted retroactively for the sixty-for-one stock split. 4. BUSINESS COMBINATIONS In November 1998, a wholly owned subsidiary of the Company merged with SimpleNet by exchanging 821,618 shares of the Company's Common Stock for all of the common stock of SimpleNet. Stockholders of SimpleNet received 398.457 shares of the Company's Common Stock for each share of SimpleNet common stock in the merger, which has been accounted for as a pooling of interests. All data presented in the accompanying financial statements has been restated to reflect the merger. Under the terms of the Merger Agreement and the related Escrow Agreement dated November 30, 1998, a total of 41,080 shares of Common Stock will be held in escrow for the purpose of indemnifying the Company against certain liabilities of SimpleNet. Such escrow will terminate on March 31, 1999. There were no material transactions between the Company and SimpleNet prior to the combination, and immaterial adjustments were recorded to conform SimpleNet's accounting policies to those of the Company. Merger related costs of $1,534,000 related primarily to legal and accounting fees, underwriting commissions and certain other expenses related directly to the Merger were recorded as a result of the transaction. The following information presents certain statement of operations data of the separate companies (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ------- ------ ------ Revenues Broadcast.com........................................... $17,654 $6,856 $1,756 SimpleNet............................................... 4,718 2,293 293 ------- ------ ------ Combined........................................ $22,372 $9,149 $2,049 ======= ====== ====== Net loss Broadcast.com........................................... $14,290 $6,474 $2,989 SimpleNet............................................... 2,154 194 8 ------- ------ ------ Combined........................................ $16,444 $6,668 $2,997 ======= ====== ======
On April 1, 1998, the Company purchased certain Web site design and development assets from CreateTech, Inc. ("CreateTech assets") for an aggregate purchase price of $400,000. The acquisition was accounted for as a purchase, whereby the excess purchase price over the net assets acquired has been recorded F-12 56 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) based upon the fair market values of assets acquired and liabilities assumed. The approximate fair value of property and equipment acquired at the date of acquisition was $65,000. The excess purchase price over the net assets acquired is being amortized on a straight-line basis over a ten-year period. Accumulated amortization totaled $25,000 at December 31, 1998. The Company's consolidated statements of operations include the results of the operations of the CreateTech assets since April 1, 1998. The operations of the CreateTech assets are not significant to the Company's operations. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, ----------------- 1998 1997 ------- ------- Computer hardware........................................... $ 8,373 $ 4,335 Computer software........................................... 935 588 Furniture and equipment..................................... 678 232 Leasehold improvements...................................... 1,636 792 ------- ------- 11,622 5,947 Accumulated depreciation.................................... (4,946) (1,876) ------- ------- $ 6,676 $ 4,071 ======= =======
Computer software represents software purchased from outside vendors for internal use and is being amortized over one year. Assets under capital leases totaling $914,000 at December 31, 1997 were purchased by the Company in 1998. 6. COMMITMENTS AND CONTINGENCIES A summary of future minimum lease payments under operating leases for buildings and equipment as of December 31, 1998 is as follows (in thousands):
FISCAL YEAR ENDING DECEMBER 31, ------------------------------- 1999...................................................... $ 949 2000...................................................... 611 2001...................................................... 393 2002...................................................... 317 2003 and thereafter....................................... 748 ------ Total............................................. $3,018 ======
Rental expense of approximately $523,000, $260,000 and $28,000 was incurred during 1998, 1997 and 1996, respectively. In December 1997, the Company entered into an agreement with Yahoo! to integrate their services and conduct certain joint marketing activities. In December 1997, the Company paid Yahoo! $1,000,000, representing a prepaid advertising credit (see Note 2). The Company agreed to pay Yahoo! an additional $1,500,000 in 1998, pursuant to which Yahoo! agreed to promote broadcast.com programming on its Web site. The Company has paid all amounts due and the agreement terminated on January 31, 1999. In December 1997, the Company entered into a line of credit, which provides for borrowings of up to $2,500,000 for working capital needs and equipment purchases. The Company's right to make borrowings under the line of credit can be terminated by the lender upon the occurrence of a default by the Company, including an uncured failure to pay principal or interest due under the facility, certain breaches of the representations and warranties made by the Company in connection with the establishment of the line of credit, and certain insolvency events of the Company. The Company is obligated to pay monthly interest on F-13 57 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) amounts outstanding under the line of credit, but no commitment fee is payable by the Company with respect to unaccessed funding capacity. The agreement expired in 1998. Pursuant to an agreement with Capitol Radio Network, Inc. ("Capitol"), the Company is obligated to purchase a minimum of $75,000 of advertising spots from Capitol each year during the term of the agreement which began in February 1997 and which expires on December 31, 2000. From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property rights. The Company is not currently aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company's financial position, results of operations or cash flows. 7. INCOME TAXES The components of income tax expense for the years ended December 31, 1998, 1997, and 1996 are (in thousands):
1998 1997 1996 ---- ---- ---- Current: Federal................................................... -- $34 $18 State..................................................... -- 9 7 -- --- --- -- 43 25 Deferred: Federal................................................... -- -- -- State..................................................... -- -- -- -- --- --- -- -- -- -- --- --- Provision for income taxes.................................. -- $43 $25 == === ===
F-14 58 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes are provided for those items reported in different periods for income tax and financial reporting purposes. The net deferred tax asset has been fully reserved because of uncertainty regarding the Company's ability to recognize the benefit of the asset in future years. Included in the deferred tax asset and valuation allowance is approximately $172,000 resulting from the exercise of stock warrants which will be credited to additional paid-in-capital when realized. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below (in thousands):
DECEMBER 31, ------------------ 1998 1997 -------- ------- Deferred tax assets: Net operating loss carryforwards.......................... $ 10,451 $ 3,797 Intangible amortization................................... 59 35 Depreciation.............................................. 438 124 Deferred revenue.......................................... 161 101 Other..................................................... 46 12 -------- ------- Gross deferred tax assets................................. 11,155 4,069 Deferred tax liabilities: Accrual to cash adjustment................................ 576 368 Capital leases............................................ 320 1 -------- ------- Net deferred tax assets..................................... 10,259 3,700 Valuation allowance......................................... (10,259) (3,700) -------- ------- Deferred tax balance........................................ $ -- $ -- ======== =======
The provision for income taxes is different than the amount computed using the applicable statutory federal income tax rate with the difference for each year summarized below:
1998 1997 1996 ---- ---- ---- Federal tax benefit at statutory rate....................... (34)% (34)% (34)% State taxes, net of federal benefit......................... (3)% (4)% (4)% Adjustment due to increase in valuation allowance........... 37% 39% 39% --- --- --- Provision for income taxes.................................. -% 1% 1%
As of December 31, 1998, the Company has available net operating loss carryforwards totaling approximately $28,270,000 which expire beginning in 2011. Utilization of net operating loss carryforwards may be limited by ownership changes which may have occurred or could occur in the future and by the separate return limitation year ("SRLY") rules. 8. STOCK PLANS The Company's 1998 Stock Option Plan for employees and consultants was approved by the Board of Directors in August 1997 and approved by the stockholders of the Company in June 1998, and, as amended, authorizes the grant of up to 5,600,000 shares of the Company's Common Stock in the form of incentive stock options ("ISOs") and nonqualified stock options ("NSOs"). The plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). Options typically expire 10 years from the date of grant, and become exercisable in installments of 20% per year commencing one year from the date of grant, or over such other vesting period determined by the Committee. Compensation expense is recorded and amortized over the options' vesting period for options granted to consultants. The amount of compensation expense is calculated based on the fair value of the options determined using the Black-Scholes Option Pricing F-15 59 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Model. Shares issued for such options come from the Company's authorized but unissued or reacquired Common Stock. The Company's 1996 Stock Option Plan for employees and consultants was approved by the Board of Directors and stockholders of the Company in April 1996 and authorizes the grant of up to 2,880,000 shares of the Company's Common Stock in the form of ISOs and NSOs. The plan is administered by the Committee. Options typically expire 10 years from the date of grant, and under Committee policy become exercisable in installments of 20% per year commencing one year from the date of grant, or over such other vesting period determined by the Committee. Shares issued for such options come from the Company's authorized but unissued or reacquired Common Stock. Effective August 19, 1997, the Company discontinued the 1996 Stock Option Plan. The Company's 1996 Stock Option Plan for Non-Employee Directors, which was approved by the Board of Directors and the stockholders in April 1996, authorizes the grant of up to 300,000 shares of the Company's Common Stock in the form of ISOs and NSOs. The plan is administered by the Committee. Options typically expire 10 years from the date of grant, and under Committee policy become exercisable in installments of 50% per year commencing one year from the date of grant, or over such other vesting period determined by the Committee. Shares issued for such options come from the Company's authorized but unissued or reacquired Common Stock. During 1998, the Company granted to non-employee directors options to purchase 30,000 shares of Common Stock at an exercise price of $4.95 per share and options to purchase 34,800 shares of Common Stock at an exercise price of $9.00 per share. During 1996, the Company granted to a non- employee director an option to purchase 30,000 shares of Common Stock at an exercise price of $0.54 per share. At December 31, 1998 and December 31, 1997, 79,800 and 30,000, respectively, of these options were outstanding. If compensation cost for the Company's stock option plans had been determined based on the fair value at the grant date for awards issued in 1998, 1997 and 1996 consistent with the provisions of FAS 123, then the Company's net loss would have been increased to the pro forma amounts indicated below:
1998 1997 1996 -------- ------- ------- Net loss -- as reported (in thousands)................. $(16,444) $(6,668) $(2,997) Net loss -- pro forma (in thousands)................... (18,319) (6,872) (3,034) Basic and diluted net loss per share -- as reported.... (0.52) (0.28) (0.15) Basic and diluted net loss per share -- pro forma...... (0.57) (0.28) (0.15)
The weighted average fair value at date of grant for options granted during 1998, 1997 and 1996 was $20.82, $1.08 and $0.43 per option, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used:
1998 1997 1996 --------- --------- --------- Dividend yield....................................... -- -- -- Expected volatility.................................. 80.2% -- -- Risk-free rate of return............................. 4.9% 5.9% 6.2% Expected life........................................ 3.0 years 3.0 years 3.0 years Expected forfeiture rate............................. 15.0% 15.0% --
F-16 60 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes activity under the Company's stock option plans during the years ended December 31, 1998 1997 and 1996:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE EXERCISE PRICE --------- -------------- -------------- Outstanding at December 31, 1995............... -- Granted...................................... 1,416,614 $ 0.54 - 9.00 $ 1.57 --------- Outstanding at December 31, 1996............... 1,416,614 0.54 - 9.00 1.57 Granted...................................... 2,554,132 3.40 - 8.05 3.41 Forfeited.................................... (174,080) 1.35 - 3.40 3.14 --------- Outstanding at December 31, 1997............... 3,796,666 0.54 - 9.00 2.74 Granted...................................... 4,084,568 4.71 - 38.13 19.44 Exercised.................................... (59,364) 1.35 - 4.95 3.65 Forfeited.................................... (312,754) 0.54 - 25.75 3.88 --------- Outstanding at December 31, 1998............... 7,509,116 0.54 - 38.13 11.77 ========= Options exercisable at December 31, 1998....... 1,304,606 $0.54 - 27.88 $ 3.14
The following table summarizes information about stock options outstanding as of December 31, 1998:
WEIGHTED AVERAGE NUMBER REMAINING NUMBER EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE - --------------- ----------- ---------------- ----------- $ 0.54 15,000 7.4 years 15,000 1.35 1,280,800 7.4 years 505,360 1.67 12,000 7.9 years 4,800 3.40 2,184,880 8.5 years 542,394 4.03 6,240 8.0 years 1,248 4.71 858,122 9.3 years 73,722 4.95 463,000 9.4 years 103,000 8.05 6,240 8.0 years 1,248 9.00 176,134 9.1 years 47,834 20.22 65,000 9.7 years 0 20.97 55,000 9.8 years 0 25.75 107,500 9.8 years 0 27.88 1,981,200 9.9 years 10,000 38.13 32,000 10.0 years 0 38.82 266,000 10.0 years 0
In addition to the option activity described above, in September 1996, the Company issued a warrant to purchase 31,920 shares of Common Stock at an exercise price of $3.40 per share, which was subsequently exercised in July 1998. In February and December 1997, the Company issued 294,240 and 318,472 warrants, respectively, for the purchase of Common Stock to two participants in private placement offerings at exercise prices of $3.40 and $4.71, respectively (see Note 9). During May 1998, the Company's Board of Directors adopted the 1998 Employee Stock Purchase Plan (the Plan). Under the Plan, eligible employees may purchase shares of the Company's Common Stock at a discount through voluntary monthly payroll deductions with a maximum contribution being 10% of an eligible employee's salary, beginning in August 1998. Semi-annually, on February 15 and August 15, participant F-17 61 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) account balances are used to purchase shares at the lesser of 85 percent of the fair market value of the Common Stock on either the first or last day of the subscription period. The Company sponsors a defined contribution plan covering substantially all employees; the plan is qualified under Section 401(k) of the Internal Revenue Code. Under the provisions of the plan, eligible participating employees may elect to contribute up to the maximum amount of tax deferred contribution allowed by the Internal Revenue Code. The Company did not make matching contributions to the plan in 1998, 1997 or 1996. 9. STOCKHOLDERS' EQUITY The Company completed an initial public offering in July 1998. The Company's Registration Statement on Form S-1 with respect to the initial public offering was declared effective on July 16, 1998, and the Company's stock began trading on the Nasdaq National Market under the symbol BCST on July 17, 1998. The Company sold 5,375,000 shares of Common Stock at a per share price of $9.00. Net proceeds to the Company, after deduction of the underwriting discount and related expenses, were approximately $43.2 million. A selling shareholder also sold 375,000 shares at a per share price of $9.00. Net proceeds to the shareholder after deduction of the underwriting discount was approximately $3.1 million. The Company did not receive any proceeds from the sale of shares by the selling shareholder. The Company granted to certain owners of Common Stock preemptive rights that expired immediately prior to the Company's initial public offering. In March 1998, the Company issued 814,332 shares of Common Stock to new and existing stockholders for $3,835,504 or $4.71 per share. In December 1997, the Company issued 4,591,570 shares of Common Stock for $21,626,294 or $4.71 per share to new and existing stockholders, including Motorola, Intel and Yahoo! In connection with these transactions, the two largest stockholders agreed to vote their shares so as to elect a second nominee of Motorola to the Board of Directors and the Company issued a warrant to Yahoo! for approximately $600,000 representing the right to purchase 318,472 shares of the Company's Common Stock at a strike price of $4.71 per share or $1,500,000. The warrant is exercisable immediately and expires on December 30, 2000. Between September 1996 and May 1997, the Company issued a total of 3,741,360 shares of Common Stock to new and existing stockholders, including Motorola and Intel, for approximately $3.40 per share or $12,712,830. In connection with Motorola's investment in September 1996, the two largest stockholders agreed to vote their shares so as to elect a nominee of Motorola to the Board of Directors. In February 1997, the Company issued a warrant to Intel for $120,000 representing the right to acquire 294,240 shares of the Company's Common Stock at a price of $3.40 per share, or $1,000,416. Under the terms of the warrant, the right to acquire 117,720 shares is exercisable immediately and expires on February 23, 2004. However, the right to acquire the remaining 176,520 shares of the Company's Common Stock at $3.40 per share did not vest and expired on June 30, 1998. In addition, an underwriting fee related to certain of these transactions totaling approximately $365,000 was recorded as a reduction in additional paid-in capital. In July 1996, the Company repurchased 240,000 shares of Common Stock from Cameron for $0.67 per share or $160,000 and subsequently resold these shares to new and existing stockholders for $0.67 per share. In June 1996, the Company issued 998,160 shares of Common Stock to new and existing stockholders for $536,012 or approximately $0.54 per share. Between January and March 1996, the Company issued a total of 6,561,120 shares of Common Stock to new and existing stockholders of the Company for $0.25 per share or $1,640,280. F-18 62 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. RELATED PARTY TRANSACTIONS The Company and Motorola, a stockholder of the Company, entered into a Negotiation Rights Agreement in September 1996 pursuant to which the Company agreed to offer Motorola a non-exclusive license to certain of its technologies as well as certain rights of notice and first negotiation with Motorola regarding licenses that the Company proposes to grant to other parties. In connection with this agreement, the Company, Motorola, and the two largest stockholders entered into a stockholders agreement pursuant to which Motorola was granted representation rights on the Company's Board of Directors and certain tag-along rights with respect to certain sales of shares by the two largest stockholders after the date of the Offering. Motorola is also a customer of the Company, to which the Company provides business services. These relationships with Motorola have generated revenues for the Company of $406,000 and $10,000 for the twelve months ending December 31, 1998 and 1997, respectively. 11. SUBSEQUENT EVENTS In February 1999, the Company announced an agreement with Trimark Holdings, Inc. in which the Company will license Trimark's library of films for distribution over the Internet. Under the terms of the agreement, Trimark will exchange 9% of its common stock (412,363 shares) for the equivalent dollar value of the Company's Common Stock (45,858 shares). The transaction, which is subject to certain conditions, is expected to be completed in the first quarter of 1999. This agreement will be accounted for under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In January 1999, the Company and Softbank Corp., Japan's largest distributor of software and computer technology publications, announced plan to form a joint venture to launch broadcast.com japan. The new company will aggregate and broadcast Japanese language-based audio and video programming to Internet users, and will also sell the Company's Internet and intranet broadcasting services to business customers in Japan. The joint venture will be accounted for using the equity method of accounting as the Company owns 40% of the joint venture. The Company's investment was funded by a note payable to Softbank Corp. In March 1999, a newly formed subsidiary of the Company merged with Net Roadshow, Inc., a provider of Internet initial public offerings and other financial roadshow services by exchanging 929,094 shares of its Common Stock for all of the common stock of Net Roadshow. Stockholders of Net Roadshow received 92.218 shares of the Company's Common Stock for each share of Net Roadshow common stock in the merger, which has been accounted for as a pooling of interests. F-19 63 BROADCAST.COM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) There were no material transactions between the Company and Net Roadshow prior to the combination, and immaterial adjustments were recorded to conform Net Roadshow's accounting policies to those of the Company. The following information presents certain statement of operations data of the separate companies (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 -------- ------- ------- Revenues Broadcast.com........................................ $ 22,372 $ 9,149 $ 2,049 Net Roadshow......................................... 1,898 30 -- -------- ------- ------- Combined.......................................... $ 24,270 $ 9,179 $ 2,049 ======== ======= ======= Net income (loss) Broadcast.com........................................ $(16,444) $(6,668) $(2,997) Net Roadshow......................................... 984 (133) -- -------- ------- ------- Combined.......................................... $(15,460) $(6,801) $(2,997) ======== ======= ======= Loss per share Broadcast.com........................................ $ (0.52) $ (0.28) $ (0.15) Combined.......................................... $ (0.47) $ (0.28) $ (0.15)
F-20 64 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Agreement and Plan of Reorganization, dated as of November 16, 1998, by and among broadcast.com inc., SN Acquisition, Inc. and Simple Network Communications, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated November 30, 1998). 2.2 -- Agreement and Plan of Reorganization, dated as of January 28, 1999, by and among Net Roadshow, Inc., NRS Acquisition, Inc. and the Company. 3.1 -- Restated Certificate of Incorporation of the Company, as amended (filed June 19, 1996) (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1/A Amendment No. 1 to Form S-1, Registration No. 333-52877). 3.1.1 -- Restated Certificate of Incorporation (filed June 23, 1998) (incorporated by reference to Exhibit 3.1.1 to the Company's Registration Statement on Form S-1/A Amendment No. 1 to Form S-1, Registration No. 333-52877). 3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 3.2.1 -- Amendment to Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2.1 to the Company's Registration Statement on Form S-1/A Amendment No. 1 to Form S-1, Registration No. 333-52877). 4.1 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1/A Amendment No. 1 to Form S-1, Registration No. 333-52877). *10.1.1 -- Employment Agreement, dated as of June 15, 1998, between the Company and Todd R. Wagner (incorporated by reference to Exhibit 10.1.1 to the Company's Registration Statement on Form S-1/A Amendment No. 1 to Form S-1, Registration No. 333-52877). *10.1.2 -- Employment Agreement, dated as of June 15, 1998, between the Company and Mark Cuban (incorporated by reference to Exhibit 10.1.2 to the Company's Registration Statement on Form S-1/A Amendment No. 1 to Form S-1, Registration No. 333-52877). 10.2.1 -- Stock Purchase Agreement, dated as of September 4, 1996, between the Company and Motorola, Inc. (incorporated by reference to Exhibit 10.2.1 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 10.2.2 -- Stock Purchase Agreement, dated as of November 15, 1996, between the Company and Premiere Radio Networks, Inc. (incorporated by reference to Exhibit 10.2.2 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 10.3 -- First Amended and Restated Registration Rights Agreement, dated as of February 24, 1997 among the Company, Motorola, Inc., Premiere Radio Networks, Inc., Capitol Radio Network, Inc., Intel Corporation and HMTF AudioNet Investors, as amended by the Addendum to First Amended and Restated Registration Rights Agreement dated as of December 30, 1997, among the Company, Yahoo! Inc., Motorola, Inc. and Intel Corporation (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 333-52877).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.4 -- Stockholders Agreement, dated as of September 4, 1996, among the Company, Motorola, Inc., Todd R. Wagner and Mark Cuban, as amended by Amendment No. 1 on December 30, 1996 and Amendment No. 2 on December 19, 1997 (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 10.5 -- December Stockholders Agreement, dated as of December 31, 1996, among the Company, Todd R. Wagner, Mark Cuban, HMTF AudioNet Investors, Motorola, Inc., Premiere Radio Networks, Inc., as amended by an Addendum to December Stockholders Agreement dated February 24, 1997, between Intel Corporation, the Company, Todd R. Wagner and Mark Cuban, and as further amended by an Addendum to December Stockholders Agreement dated December 30, 1997, between Yahoo! Inc., the Company, Todd R. Wagner and Mark Cuban (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). +10.6 -- Network Radio Sales Representation Agreement dated as of November 15, 1996, between the Company and Premiere Radio Networks, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). *10.7 -- The Company's 1998 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). *10.8 -- The Company's 1996 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). *10.9 -- The Company's 1998 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1/A Amendment No. 1 to Form S-1, Registration No. 333-52877). *10.10 -- Form of the Company's Stock Option Agreement under the 1998 Stock Option Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). *10.11 -- The Company's 1996 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). +10.12 -- RealNetworks License Agreement, dated as of January 1, 1998, between the Company and RealNetworks, Inc. (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). +10.13 -- Media Player License Agreement, dated as of January 1, 1998, between the Company and Microsoft Corporation (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 10.14 -- Form of Directors and Officers Indemnification Agreement (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 10.15 -- Lease Agreement, dated as of December 2, 1996, between the Company and George W. Lollis and Daisy Lollis (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 10.16 -- Master Lease of Personal Property No. 3769, dated April 15, 1998, between the Company and Charter Financial, Inc. (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, Registration No. 333-52877).
66
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.17 -- The Security and Loan Agreement (Accounts Receivable), dated December 15, 1997, between the Company and Imperial Bank (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 10.18 -- Imperial Bank Note, dated December 15, 1997, between the Company and Imperial Bank (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, Registration No. 333-52877). 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of PricewaterhouseCoopers LLP. 24.1 -- Power of Attorney (please see signature page of this report). 27.1 -- Financial Data Schedule.
- --------------- + Information contained in such agreement has been omitted in connection with a confidential treatment request, marked with asterisks and filed separately with the Commission. * Management contract or compensation plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. EX-2.2 2 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.2 AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF JANUARY 28, 1999, BY AND AMONG NET ROADSHOW, INC., NRS ACQUISITION, INC. AND THE COMPANY 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS Definitions..............................................................................................1 ARTICLE II THE MERGER Section 2.1. The Merger................................................................................4 Section 2.2. Closing; Effective Time...................................................................4 Section 2.3. Articles of Incorporation.................................................................4 Section 2.4. Bylaws....................................................................................5 Section 2.5. Directors and Officers....................................................................5 ARTICLE III CONVERSION OF SHARES; SHAREHOLDER APPROVAL Section 3.1. Effect on Capital Stock...................................................................5 Section 3.2. Escrow....................................................................................5 Section 3.3. Dissenting Shares.........................................................................6 Section 3.4. Exchange of Certificates..................................................................6 Section 3.5. Treatment of Fractional Shares............................................................6 Section 3.6. Shareholders' Meeting.....................................................................6 Section 3.7. Tax and Accounting Consequences...........................................................6 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 4.1. Corporate Organization....................................................................7 Section 4.2. Capital Stock.............................................................................7 Section 4.3. Subsidiaries..............................................................................7 Section 4.4. Corporate Authority.......................................................................7 Section 4.5. Financial Statements......................................................................8 Section 4.6. Operations Since December 31, 1998........................................................8 Section 4.7. No Undisclosed Liabilities................................................................9 Section 4.8. Taxes.....................................................................................9
3 Section 4.9. Governmental Permits....................................................................10 Section 4.10. Real Property...........................................................................10 Section 4.11. Real Property Leases....................................................................10 Section 4.12. Intellectual Property...................................................................11 Section 4.13. Labor Relations.........................................................................11 Section 4.14. Employee Benefit Plans..................................................................11 Section 4.15. Contracts...............................................................................12 Section 4.16. No Violation, Litigation or Regulatory Action...........................................12 Section 4.17. Insurance...............................................................................13 Section 4.18. Certain Transactions or Arrangements....................................................13 Section 4.19. Customer and Supplier Relationships.....................................................13 Section 4.20. Finders.................................................................................13 Section 4.21. Disclosure..............................................................................13 Section 4.22. Bank Accounts...........................................................................13 Section 4.23. Payment of Certain Expenses.............................................................13 Section 4.24. Year 2000...............................................................................13 Section 4.25. Distributions...........................................................................14 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO Section 5.1. Organization............................................................................14 Section 5.2. Authority...............................................................................14 Section 5.3. No Finder...............................................................................14 Section 5.4. Absence of Proceedings..................................................................15 Section 5.5. Capitalization..........................................................................15 Section 5.6. Financial Statements....................................................................15 Section 5.7. SEC Reports.............................................................................15 Section 5.8. Absence of Adverse Changes..............................................................15 Section 5.9. Governmental Consents...................................................................15
4 ARTICLE VI ADDITIONAL COVENANTS Section 6.1. Investigation of the Company by Parent..................................................16 Section 6.2. Certain Agreements......................................................................16 Section 6.3. Operations Prior to the Effective Time..................................................16 Section 6.4. No Public Announcement..................................................................18 Section 6.5. Governmental Filings; Consents..........................................................18 Section 6.6. Employee Benefits.......................................................................18 Section 6.7. Affiliates of the Company and Parent....................................................18 Section 6.8. Funding of Certain Obligations..........................................................18 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO Section 7.1. No Misrepresentation or Breach of Covenants and Warranties..............................19 Section 7.2. Resignations of Directors...............................................................19 Section 7.3. Litigation..............................................................................19 Section 7.4. Necessary Approvals and Consents........................................................19 Section 7.5. Corporate Action........................................................................19 Section 7.6. Adoption of Agreement...................................................................19 Section 7.7. Pooling of Interests....................................................................19 Section 7.8. Noncompetition Agreements...............................................................20 Section 7.9. Withholding Taxes.......................................................................20 Section 7.10. Opinion.................................................................................20 ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY Section 8.1. No Misrepresentation or Breach of Covenants and Warranties..............................20 Section 8.2. Litigation..............................................................................20 ARTICLE IX TERMINATION Section 9.1. Termination.............................................................................20 Section 9.2. No Liability Upon Termination...........................................................21
5 ARTICLE X SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION PROVISIONS Section 10.1. Survival of Representations and Warranties..............................................21 Section 10.2. Indemnification.........................................................................21 Section 10.3. Appointment of Representative...........................................................21 Section 10.4. Control of Actions and Proceedings......................................................21 ARTICLE XI ESCROW ARRANGEMENTS Section 11.1. Escrow Term.............................................................................22 Section 11.2. Notice of Claims........................................................................22 Section 11.3. Resolution of Notice of Claims and Transfer of Escrow Stock.............................22 Section 11.4. Rights Relating to Escrow Stock.........................................................23 ARTICLE XII GENERAL PROVISIONS Section 12.1. Notices.................................................................................23 Section 12.2. Partial Invalidity......................................................................24 Section 12.3. Execution in Counterparts...............................................................24 Section 12.4. Governing Law...........................................................................24 Section 12.5. Assignment; Successors and Assigns......................................................24 Section 12.6. Titles and Headings.....................................................................24 Section 12.7. Schedules and Exhibits..................................................................24 Section 12.8. Entire Agreement; Amendments............................................................25 Section 12.9. Waivers.................................................................................25 Section 12.10. Specific Performance....................................................................25
6 AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is dated as of January 28, 1999, by and among Net Roadshow, Inc., a Georgia corporation (the "Company") and broadcast.com inc., a Delaware corporation ("Parent") and NRS Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of Parent ("MergerCo") . W I T N E S S E T H WHEREAS, MergerCo is a recently formed Delaware corporation organized for the purpose of effecting the transactions contemplated by this Agreement; WHEREAS, Parent is the owner of all of the issued and outstanding shares of the capital stock of MergerCo; WHEREAS, the parties hereto intend that the transactions contemplated by this Agreement constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended; WHEREAS, the respective Boards of Directors of MergerCo and the Company deem it advisable and in the best interests of MergerCo and the Company, respectively, and their respective shareholders, that MergerCo merge with and into the Company (the "Merger") pursuant to this Agreement and the articles of merger (the "Merger Agreement") substantially in the form of Exhibit A attached hereto, with the result that the Company will become a wholly-owned subsidiary of Parent and the shares of capital stock of the Company (the "Shares") issued and outstanding immediately prior to the Effective Time (as defined in Section 2.2) will be converted into the right to receive shares of Common Stock issued by Parent; WHEREAS, to induce Parent and MergerCo to enter into this Agreement, the shareholders of the Company have entered into a Shareholder Voting Agreement pursuant to which such shareholders have agreed to vote in favor of the transactions contemplated hereby and to take certain additional actions with respect thereto; WHEREAS, for accounting purposes it is intended that the Merger shall be accounted for as a pooling of interests transaction; WHEREAS, as a further condition and inducement to Parent's willingness to enter into this Agreement, certain employees of the Company who are also shareholders of the Company have, concurrently with the execution of this Agreement, executed and delivered non-competition agreements which agreements shall only become effective at the Effective Time; and WHEREAS, the Company, MergerCo and Parent desire to make certain representations, warranties, covenants and agreements in connection with the Merger and to prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the mutual terms, conditions and other covenants and agreements set forth herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS In addition to the other words and terms defined elsewhere in the Agreement, as used in this Agreement, the following words and terms have the meanings specified or referred to below: 7 "Affiliate" means, a Person that directly or indirectly controls, is controlled by, or is under common control with, a specified Person. A Person shall be deemed to control another person if such person possesses, directly or indirectly, the power to direct or cause the direction of the management policies of such other Person, whether through the ownership of securities, by contract or otherwise. "Affiliate Letter" has the meaning specified in Section 6.7. "BCC" has the meaning specified in Section 2.1. "Certificate" has the meaning specified in Section 3.4. "Closing" has the meaning specified in Section 2.2. "Closing Date" has the meaning specified in Section 2.2. "Code" means the Internal Revenue Code of 1986, as amended. "Company" has the meaning specified in the preamble to this Agreement. "Company Common Stock" has the meaning specified in Section 4.2. "Company Group" has the meaning specified in Section 4.14. "December Balance Sheet" has the meaning specified in Section 4.5. "Deductible" has the meaning specified in Section 10.2. "Deficiency or "Deficiencies" has the meaning specified in Section 10.2. "Defined Benefit Plan" has the meaning specified in Section 4.14. "Dissenting Shares" has the meaning specified in Section 3.3. "Effective Time" has the meaning specified in Section 2.2. "Employee Benefit Plan" has the meaning specified in Section 4.14. "Employee Plan" has the meaning specified in Section 4.14. "Encumbrance" means any lien, claim, charge, security, interest, mortgage, pledge, easement, conditional sale or other title retention agreement, defect in title, covenant or other encumbrance or restriction of any kind. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escrow" has the meaning specified in Section 3.2. "Escrow Stock" has the meaning specified in Section 11.1. "Escrow Term" has the meaning specified in Section 11.1. "Exchange Ratio" means the number of shares of Parent Common Stock to be issued pursuant to this Agreement in exchange for one Share. "Financial Statements" has the meaning specified in Section 4.5. 2 8 "Governmental Body" means any federal, state, local or foreign court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. "Governmental Permits" has the meaning specified in Section 4.9. "Intellectual Property" has the meaning specified in Section 4.12(a). "IRS" means the Internal Revenue Service. "Material Adverse Effect" means a material adverse effect on (i) the financial condition or results of operations of the Company other than changes resulting from general economic conditions in the United States or general conditions in the financial services industry in the United States or (ii) the ability of the Company to consummate the transactions contemplated hereby. "Merger" has the meaning specified in the preamble to this Agreement. "Merger Agreement" has the meaning specified in the preamble to this Agreement. "MergerCo" has the meaning specified in the preamble to this Agreement. "Merger Consideration" has the meaning specified in Section 3.1(c). "Multiemployer Plan" has the meaning specified in Section 4.14(a). "Notice of Claims" has the meaning specified in Section 11.2(a). "Parent" has the meaning specified in the preamble to this Agreement. "Parent Common Stock" means the common stock of Parent, $0.01 par value per share. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA, or any other governmental agency, department or instrumentality succeeding to the functions of said Corporation. "Permitted Encumbrances" means only with respect to real estate and interests therein, easements, covenants, conditions, restrictions and other matters of record, and incidental mechanics' and other similar liens, none of which, individually or in the aggregate, materially affect the value of, or marketability of title to, the property subject thereto or the use to which such property is presently put. "Person" means and includes an individual, a partnership, a corporation, a trust, a joint venture, other similar entities, an unincorporated organization and any governmental or regulatory body or other agency or authority. "Redemption Rights" has the meaning specified in Section 4.2. "Relative" means a person's parents, children, siblings and spouse, parents and siblings of such parent's spouse and the spouses of such person's children and siblings, such relation by either blood or adoption. "Representative" has the meaning specified in Section 10.3. "Returns" has the meaning specified in Section 4.8(a). "SEC" means the Securities and Exchange Commission. 3 9 "SEC Reports" has the meaning specified in Section 5.7. "Secretary of State" means the Secretary of State of the State of Georgia. "Shareholder Group" has the meaning specified in Section 10.2. "Shareholders' Approval" has the meaning specified in Section 3.6. "Shares" has the meaning set forth in the preamble of this Agreement. "Sublease" has the meaning specified in Section 4.11. "Subsidiary" shall mean, as of the applicable point in time, with respect to any Person, each corporation, partnership, joint venture or other entity, of which such Person owns, directly or indirectly, more than 50% of the outstanding voting securities or equity interests. "Surviving Corporation" has the meaning specified in Section 2.1. "Tax" or "Taxes" has the meaning specified in Section 4.8(a). "Treasury Regulations" has the meaning specified in Section 4.8(d). "USRPHC" has the meaning specified in Section 4.8(d). "Year 2000 Compliant" has the meaning specified in Section 4.24. ARTICLE II THE MERGER SECTION 2.1. THE MERGER. Subject to the terms and conditions of this Agreement and the Merger Agreement, at the Effective Time (as defined in Section 2.2 hereof) and in accordance with the applicable provisions of the Georgia Business Corporation Code of the State of Georgia (the "BCC"), MergerCo will be merged with and into the Company and the Company shall be the surviving corporation in the Merger (the "Surviving Corporation") and the separate existence of MergerCo shall cease and the other effects of the Merger shall be as set forth in applicable provisions of the BCC. The name of the Surviving Corporation shall continue to be Net Roadshow, Inc. To effectuate the Merger, MergerCo and the Company shall, concurrently with the Closing (as hereafter defined), execute and file, among other things, a Certificate of Merger in the office of the Secretary of State of the State of Georgia ("Secretary of State") in accordance with the applicable provisions of the BCC. SECTION 2.2. CLOSING; EFFECTIVE TIME. Subject to the provisions of Articles VII and VIII, the closing of the Merger (the "Closing") shall take place in New York, New York at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New York, New York 10166, as soon as practicable but in no event later than 10:00 a.m. New York time on the third business day after the date on which each of the conditions set forth in Articles VII and VIII have been satisfied or waived by the party or parties entitled to the benefit of such conditions, or at such other place, at such other time or on such other date as Parent and the Company may mutually agree. The date on which the Closing actually occurs is hereinafter referred to as the "Closing Date". At the Closing, MergerCo and the Company shall cause a Certificate of Merger to be executed and filed with the Secretary of State in accordance with the BCC. The Merger shall become effective as of the date and time of such filing (the "Effective Time"). SECTION 2.3. ARTICLES OF INCORPORATION. At the Effective Time, and without any further action on the part of the Company or MergerCo, the articles of incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the articles of incorporation of the Surviving Corporation, until thereafter altered, amended or repealed as provided therein and in accordance with applicable law. 4 10 SECTION 2.4. BYLAWS. The bylaws of the Company, as in effect immediately prior to the Effective Time, shall become, from and after the Effective Time, the bylaws of the Surviving Corporation, until thereafter altered, amended or repealed as provided therein and in accordance with applicable law. SECTION 2.5. DIRECTORS AND OFFICERS. The directors and officers of MergerCo immediately prior to the Effective Time shall become, from and after the Effective Time, the directors and officers of the Surviving Corporation, until their respective successors are duly elected or appointed and shall qualify or their earlier resignation or removal. ARTICLE III CONVERSION OF SHARES; SHAREHOLDER APPROVAL SECTION 3.1. EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any Shares or any shares of capital stock of MergerCo: (a) Common Stock of MergerCo. Each share of common stock of MergerCo, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock, par value $0.01 per share, of the Surviving Corporation. (b) Parent and MergerCo-Owned Stock. Each Share owned by Parent, MergerCo or any Affiliate of Parent or MergerCo shall automatically be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor. (c) Conversion of Shares. All other issued and outstanding Shares and all rights existing with respect thereto shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding and shall be converted into that number of fully paid and nonassessable shares of Parent Common Stock (the "Merger Consideration") equal to the following fraction: (i) the numerator shall be 464,550; and (ii) the denominator shall be the number of Shares immediately prior to the Effective Time; provided, however, that "Dissenting Shares" (as hereafter defined) shall be governed by Section 3.3 hereof and provided further that cash will be paid in lieu of any fractional shares as provided in Section 3.5. (d) Certain Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Shares), reorganization, recapitalization or other like change with respect to Parent Common Stock or Shares occurring after the date hereof and prior to the Effective Time, including, if paid, the stock dividend anticipated to be mailed or delivered on or about February 11, 1999 to the stockholders of Parent of record at the close of business on February 1, 1999. SECTION 3.2. ESCROW. At the Closing, Parent shall place into escrow (the "Escrow") 23,228 shares of Parent Common Stock. The Escrow will serve as a fund for the indemnity obligations set forth in Article X hereof. Such shares of the Parent Common Stock represent the aggregate number of shares to be contributed to the Escrow by the holders of record of Shares immediately prior to the Effective Time, the allocation of which shall be set forth in Schedule 3.2 in proportion to the respective shareholdings of such holders. Article XI sets forth the arrangements with respect to the Escrow. 5 11 SECTION 3.3. DISSENTING SHARES. Shares entitled to a right to dissent under Article 13 of the BCC (the "Dissenting Shares") shall have only such rights as are afforded to the holder thereof by the provisions of Article 13 of the BCC. SECTION 3.4. EXCHANGE OF CERTIFICATES. Subject to the provisions regarding the treatment of fractional shares herein and after deduction of the contributions of the shareholders of the Company to the Escrow as specified in Section 3.2 and Article XI, Parent shall, as promptly as practicable after the Effective Time, make available stock certificates representing the shares of Parent Common Stock issued in the Merger to the persons legally entitled thereto upon surrender of certificates which immediately prior to Effective Time represented Shares. At the Effective Time, each Share converted into the right to receive the Merger Consideration pursuant to Section 3.1(c) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such Shares (a "Certificate") shall, to the extent such Certificate represents such Shares, cease to have any rights with respect thereto, except the right to receive the Merger Consideration applicable thereto, upon surrender of such Certificate. After the Effective Time there shall be no transfers on the stock transfer books of the Surviving Corporation of the Shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for transfer or for any other reason, they shall be canceled and exchanged for Parent Common Stock and cash in lieu of any fractional share as provided in this Article III, except as otherwise provided by law and as adjusted for any dividends paid or other distributions made after the Effective Time with respect to Parent Common Stock, if the record date set for such dividends or distributions is a date occurring after the Effective Time. SECTION 3.5. TREATMENT OF FRACTIONAL SHARES. No fractional share of Parent Common Stock nor scrip certificate for such fractional share shall be issued in the Merger. In lieu thereof, any holder of Shares otherwise entitled to receive a fractional share of Parent Common Stock shall be paid an amount in cash equal to the value of such fractional share interest based on the closing price per whole share of Parent Common Stock as reported on the NASDAQ National Market on the last trading day prior to the Effective Time. If more than one Certificate representing Shares shall be surrendered at one time for the account of the same shareholder, the number of full shares of Parent Common Stock for which such Certificates shall be delivered shall be computed on the basis of the aggregate number of Shares represented by such Certificates so surrendered. SECTION 3.6. SHAREHOLDERS' MEETING. The Company shall, as promptly as practicable following the date of this Agreement, (i) take all action necessary in accordance with applicable law to convene a meeting of, or obtain a written consent from, its shareholders for the purpose of considering, approving and adopting this Agreement and the transactions contemplated hereby (the "Shareholders' Approval"), (ii) include in the notice for such Shareholders' Approval the recommendation of the Board of Directors of the Company that the shareholders of the Company vote in favor of the approval and adoption of this Agreement and the transactions contemplated hereby and (iii) use its reasonable best efforts to obtain the necessary approval of this Agreement and the transactions contemplated hereby by its shareholders. SECTION 3.7. TAX AND ACCOUNTING CONSEQUENCES. (a) It is intended by the parties hereto that the merger shall constitute a "reorganization" within the meaning of Section 368(a) of the Code. The parties hereto adopt this agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations. (b) It is intended by the parties hereto that the merger shall qualify for accounting treatment as a pooling of interests. 6 12 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY As an inducement to Parent and MergerCo to enter into this Agreement and to consummate the transactions contemplated hereby, the Company represents and warrants to Parent and MergerCo as follows: SECTION 4.1. CORPORATE ORGANIZATION. The Company is a corporation duly organized, legally existing and in good standing under the laws of the State of Georgia. The Company is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions in which the ownership or leasing of its properties or the conduct of its business requires such qualification (except where the failure to so qualify would not have a Material Adverse Effect). The Company has all requisite corporate power to own or lease and to operate and use its properties and assets and to carry on its business as currently conducted and as currently proposed to be conducted by the Company. The Company has delivered or made available to Parent and MergerCo complete and correct copies of its Articles of Incorporation and Bylaws, each as in effect on the date hereof. Prior to the date hereof, the Company has not been a subsidiary of any other corporation or entity. SECTION 4.2. CAPITAL STOCK. As of the date hereof, the authorized capital stock of the Company consists of 1,000,000 shares of common stock, par value $1.00 per share (the "Company Common Stock"). As of the date hereof, 10,075 shares of Company Common Stock are issued and outstanding and are owned by the Persons and in the amounts set forth on Schedule 4.2 hereof. There are no options to purchase or rights to acquire shares of Company Common Stock or other equity position in the Company. None of the issued and outstanding shares of capital stock of the Company has been issued in violation of, or is subject to, any preemptive or any subscription rights. Except for the right of the Company to redeem under certain circumstances the shares of Company Common Stock issued to certain individuals pursuant to employment agreements between such individual and the Company as described on Schedule 4.2 (the "Redemption Rights"), and as provided in this Agreement and the transactions contemplated hereby, there are no agreements, arrangements, warrants, options, puts, calls, rights, option or other employee benefit plans or other commitments or understandings of any nature to which the Company or any shareholder of the Company is a party relating to the issuance, sale, purchase, redemption, conversion, exchange, registration, voting or transfer of any shares of Company Common Stock or other securities of the Company. The names of each of the record holders who is subject to the Redemption Rights are set forth on Schedule 4.2. As of the Effective Time, no Redemption Rights shall remain outstanding. All of the outstanding shares of Company Common Stock are duly authorized and validly issued and fully paid and nonassessable, free of any preemptive or subscription rights, free and clear of all Encumbrances and were issued in compliance with all applicable securities laws. The Company is not in active discussions, formal or informal, with any person or entity regarding the issuance of any form of additional equity securities of the Company that has not been issued or committed to prior to the date of this Agreement. Except as provided in this Agreement and other transaction documents or any transaction contemplated hereby or thereby, there are no voting trusts, proxies or other agreements or understandings with respect to the voting of shares of Company Common Stock. SECTION 4.3. SUBSIDIARIES. The Company has no Subsidiaries. Except for a 1.0% equity interest in Talkpoint Communications, Inc., the Company does not own, directly or indirectly, any voting securities or other equity interests of any Person. SECTION 4.4. CORPORATE AUTHORITY. (a) The Company has all requisite corporate power and authority to execute and deliver this Agreement, to consummate the transactions, subject to the conditions set forth herein, contemplated hereby and to comply with the terms, conditions and provisions hereof. The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action. This Agreement has been duly executed and delivered by the Company and constitutes, and each other instrument contemplated hereby or thereby, when executed and delivered by the Company, will constitute, the valid and binding obligation of the Company enforceable in accordance with its terms. 7 13 (b) Except as set forth in Schedule 4.4, neither the execution and delivery by the Company of this Agreement or of any of the other instruments contemplated hereby, nor the consummation by the Company of any of the transactions contemplated hereby, nor compliance by the Company with or fulfillment thereby of the terms, conditions and provisions hereof will: (i) violate any provision of the Company's articles of incorporation or bylaws; (ii) result in the acceleration of, or entitle any party to accelerate (whether after the giving of notice or lapse of time or both), any debt obligation of the Company; (iii) violate, or result with giving of notice or lapse of time or both in any violation of, or result in the creation or imposition of, any Encumbrance upon any of the properties of the Company pursuant to any provision of, any mortgage, lien, lease, agreement, Governmental Permit, item of Intellectual Property, indenture, license, instrument, law, regulation, order, arbitration award, judgment or decree to which the Company is a party or by which the Company or any of its properties is bound, the effect of all of which violations, creations and impositions would result in liability to the Company in excess of $50,000 in the aggregate; (iv) constitute an event permitting modification, amendment or termination of a mortgage, lien, lease, agreement, Governmental Permit, item of Intellectual Property, indenture, license, instrument, order, arbitration award, judgment or decree to which the Company is a party or by which the Company or any of its properties is bound, which modification(s), amendment(s) or termination(s) would result in liability to the Company in excess of $50,000 in the aggregate; or (v) except for the filings contemplated in Section 2.1, require the approval, consent, authorization or act of, or the making by the Company or any other Person, of any declaration, filing or registration with any third Person or any Governmental Body, except to the extent that the failure to obtain any of the foregoing does not result in a Material Adverse Effect. SECTION 4.5. FINANCIAL STATEMENTS. Schedule 4.5 contains true and complete copies of (a) the balance sheets of the Company as of December 31, 1997 and December 31, 1998 (such 1998 balance sheet, the "December Balance Sheet") and the related statements of income and shareholders' equity and cash flows for the years then ended. The financial statements referred to in the preceding sentence are herein referred to collectively as the "Financial Statements". Subject, to normal year-end adjustments, all of the Financial Statements present fairly the financial condition and results of operations of the Company and its consolidated subsidiaries as of such dates and for such periods; such balance sheets and the notes thereto disclose all liabilities, direct or contingent, of the Company and its consolidated subsidiaries as of the dates thereof required to be disclosed by generally accepted accounting principles; and such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis except that such financial statements do not have footnotes. SECTION 4.6. OPERATIONS SINCE DECEMBER 31, 1998. (a) Except as set forth in the Financial Statements, since December 31, 1998, there has been no Material Adverse Effect. (b) Except for the transactions contemplated by this Agreement or described herein, since December 31, 1998 the Company has conducted its business in the ordinary course and in conformity with past practice and, without limiting the foregoing: (i) the Company has not made any capital expenditures or commitments for the acquisition or construction of any assets characterized as "property and equipment" on the Financial Statements exceeding $20,000 per item or exceeding $50,000 in the aggregate; 8 14 (ii) Except as set forth in Schedule 4.6(ii) there has been no declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of the Company, and no issuance of any capital stock of the Company or of any securities convertible into or exchangeable or exercisable for, or otherwise representing any right to acquire, any such capital stock; (iii) the Company has not redeemed, repurchased, or otherwise acquired any of its capital stock or securities convertible into or exchangeable or exercisable for its capital stock or any other securities of the Company, and has not entered into any agreement, arrangement or other commitment to do so; (iv) the Company has not adopted or amended any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation or other plan, agreement, trust fund or arrangement or other plan for the benefit of its employees; (v) the Company has not granted any bonus or other special compensation or increased compensation or benefits payable or to become payable to any of its directors, officers or employees except, in the case of employees, for increases, bonuses or special compensation in the ordinary course of business consistent with past compensation practice, nor taken any action with respect to the grant or increase of severance or termination pay nor entered into any employment, consulting or similar agreement; (vi) the Company has not incurred any indebtedness for money borrowed; (vii) the Company has not disposed of or acquired any assets or properties, other than in the ordinary course of business consistent with past practice; (viii) the Company has not been the subject of any change in accounting methods, principles or practice, except insofar as may have been required by a change in generally accepted accounting principles; (ix) there has been no damage, destruction or loss to tangible or intangible property which has resulted in a Material Adverse Effect; and (x) the Company has not entered into any agreement, arrangement or understanding, or otherwise resolved or committed, to do any of the foregoing. SECTION 4.7. NO UNDISCLOSED LIABILITIES. The Company is not subject to any obligation or liability of any nature (whether accrued, absolute, contingent, inchoate or otherwise, including, without limitation, unasserted claims), which would individually or in the aggregate be required by generally accepted accounting principles to be reflected on a balance sheet of the Company but is not reflected on the December Balance Sheet or the notes thereto, other than (i) obligations pursuant to or in connection with this Agreement or the transactions contemplated hereby, (ii) liabilities and obligations incurred in the ordinary course of business after December 31, 1998 and (iii) liabilities which do not have a Material Adverse Effect. SECTION 4.8. TAXES. (a) Except as set forth on Schedule 4.8(a), the Company has filed or caused to be filed all federal, state, foreign and local, tax returns, tax information returns, reports and estimates ("Returns"), for all taxable or reporting periods ending at or before the Effective Time (taking into account applicable extension periods) to the extent required to be filed by the Company under the applicable federal, foreign, state or local law, at or before the Effective Time; all Taxes shown to be due on such Returns have been paid in full when due; and all such Returns are true, complete and accurate in all material respects. As used in this Agreement, "Taxes" or "Tax" means all taxes of any kind and any interest or penalties related thereto, including, without limitation, net income, capital gains, gross receipts, franchise, or withholding taxes validly imposed upon, the Company with respect to such taxes. 9 15 (b) There are no claims or investigations by any taxing authority pending or to the knowledge of the Company threatened against the Company for any past due Taxes for periods ending prior to the Effective Time. (c) Except as set forth on Schedule 4.8(c), the Company has (i) withheld all amounts required to be withheld from the wages of its employees, with respect to tax withholding and taxes due from such employees under the Federal Insurance Contributions Act or any other foreign, federal, state, or local unemployment tax laws for payroll periods ending before the close of business on the day before the Effective Time and (ii) filed all foreign, federal, state or local returns and reports that were required by the applicable foreign, federal, state or local law to be filed on or before the day before the Effective Time (taking into account applicable extension periods) with respect to such withholding for such periods. (d) The Company is not a United States Real Property Holding Corporation (a "USRPHC") within the meaning of Section 897 of the Code and was not a USRPHC on any "determination date" (as defined in Section 1.897-2(c) of the regulations promulgated by the Treasury Department pursuant to the Code (the "Treasury Regulations")) that occurred in the five-year period preceding the Effective Time. (e) The Company has not agreed and is not required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state or local law by reason of a change in accounting method initiated by it or any other relevant party or it has no knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or assets of the Company. (f) The Company has filed a valid election to be treated as an S corporation for federal income tax purposes for all taxable periods beginning on January 1, 1997, which election was not terminated prior to January 1, 1999, and has filed elections under the applicable laws of the States listed on Schedule 4.8, which elections were not terminated prior to the January 1, 1999. SECTION 4.9. GOVERNMENTAL PERMITS. The Company owns, holds or possesses all governmental licenses, franchises, permits, privileges, immunities, approvals and other authorizations which are necessary for its ownership, leasing, operation and use of its assets and properties and which are required for its carrying on and conducting its businesses as currently conducted and as proposed to be conducted (herein collectively called "Governmental Permits"), except where the failure to own, hold or possess the same would not have a Material Adverse Effect. Each of such material Governmental Permits is valid, and in full force and effect and, to the knowledge of the Company, no suspension or cancellation of any of the same is threatened, except for such suspensions or cancellations that would not have a Material Adverse Effect. No written notice of cancellation, of default or of any dispute concerning any Governmental Permit, or of any event, condition or state of facts which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any Governmental Permit has been received by the Company, except for those that, singly or in the aggregate, would not have a Material Adverse Effect. To the knowledge of the Company, there are no pending or proposed changes in permit requirements that would require the Company to make material additional monetary payments in order to obtain, renew or comply with any Governmental Permit, except for those that would not in the aggregate have a Material Adverse Effect. SECTION 4.10. REAL PROPERTY. The Company is not the owner of record or beneficial owner of any real property. SECTION 4.11. REAL PROPERTY LEASES. The sublease ("the Sublease") of the Company's headquarters in Atlanta, Georgia which is identified on Schedule 4.11 is the only lease, sublease or other agreement or document of the Company with respect to real property. A correct and complete copy of the Sublease has been delivered to Parent. The Company holds good and valid leasehold title to the property which is the subject of the Sublease, in each case free of all Encumbrances. To the knowledge of the Company, there are no existing defaults under the Sublease, and no event has occurred which with notice or lapse of time, or both, could constitute an event of default under the Sublease, which default would result in a Material Adverse Effect. The transactions contemplated by this Agreement will not result in a default under the Sublease (which default would have a Material Adverse Effect). 10 16 SECTION 4.12. INTELLECTUAL PROPERTY. (a) Schedule 4.12 contains a complete and correct list of all United States and foreign patents, patent applications, registered trademarks, trademark applications, registered service marks, service mark applications, trade names and registered copyrights which are material to the business the Company (the "Intellectual Property"), including, if applicable, (i) the date of issuance or registration, (ii) the serial, patent or registration number, (iii) the date of application, (iv) the expiration date and (v) the country of registration of such items of Intellectual Property and any material licenses thereunder. (b) The right, title or interest of the Company in each item of Intellectual Property is free and clear of Encumbrances which would have a Material Adverse Effect. (c) The Company has not received written notice that is still pending to the effect that the Company has infringed upon any patent, trademark, service mark, trade name, copyright, brand name, logo, symbol or other intellectual property right of any third party; nor is there any action pending or, to the knowledge of the Company, threatened, against the Company claiming that the Company has, whether directly, contributorily or by inducement, infringed any trade secret or misappropriated any other intellectual property which infringement, notice, charge, claim, or assertion, as the case may be, would have a Material Adverse Effect. (d) The Company has not sent or otherwise communicated to another Person any notice, charge, claim or other assertion of, and the Company has no knowledge of, any present, impending or threatened patent, trademark or copyright infringement of any Intellectual Property which infringement would have a Material Adverse Effect. SECTION 4.13. LABOR RELATIONS. No employee of the Company or of any employment agency, employee leasing company or other contractor with the Company for employees is, or has been during the immediately preceding six (6) years, represented by any union or other group representing employees. To the knowledge of the Company there are no organizing efforts by any union or other group seeking to represent any employees of the Company or of any employment agency, employee leasing company or other contractor with the Company for employees. The Company and any employment agency, employee leasing company or other contractor with the Company for employees has complied and is in compliance, in respect of its employees, in all material respects with all applicable statutes, regulations, orders and restrictions of the United States of America, all states and other subdivisions thereof, all foreign jurisdictions and instrumentalities of the foregoing. The Company has been and is in compliance with the provisions of any service agreement with any employment agency, employee leasing company or other contractor with the Company for employees, and such employment agency, employee leasing company or other contractor with the Company for employees has been and is in compliance with the provisions of any such agreement with the Company. SECTION 4.14. EMPLOYEE BENEFIT PLANS. The term "Employee Plan" shall mean any pension, retirement, profit-sharing, deferred compensation, stock purchase, stock option, bonus or incentive plan, any medical, vision, dental or other health plan, any life insurance plan, vacation, severance, disability or any other employee benefit plan, program, policy, or arrangement, whether written, unwritten, formal or informal, including, without limitation, any "Employee Benefit Plan" as defined in Section 3(3) of ERISA, any employee benefit plan covering any employees of any other entity which, together with the Company, constitutes a single employer within the meaning of Section 414 of the Code (hereinafter collectively referred to as the "Company Group") to which any member of the Company Group has, or has had during the immediately preceding six (6) years, any direct or indirect obligations to make payments to or to contribute to, whether voluntary, contingent or otherwise, is a party or is bound and under which any employees of the Company Group are eligible to participate or derive a benefit, except any government-sponsored program or government-required benefit. Schedule 4.14 lists each Employee Plan which is presently in effect, or which was previously in effect (if it may result in a material liability). No Employee Plan is, or has been during the immediately preceding six (6) years, a defined benefit plan as defined in Section 3(35) of ERISA (a "Defined Benefit Plan") or is, or has been during the immediately preceding six (6) years, a multiemployer plan within the meaning of Section 3(37) of ERISA (a "Multiemployer Plan"). 11 17 SECTION 4.15. CONTRACTS. (a) Except as set forth in Schedule 4.15, the Company is not a party to, nor bound by, nor is any of its properties subject to, any written or oral agreement described as follows: (i) any contract (except purchase orders that involve the purchase or sale of goods) with a value, or involving payments the Company, of more than $50,000 and which is not cancelable within six months after the date of notice of cancellation without liability upon such notice given at or after the Effective Time; (ii) any contract for the employment of any officer or employee (other than, with respect to any employee, contracts which are terminable without liability upon notice of 30 days or less and do not provide for any further payments following such termination) or with a former officer or employee pursuant to which payments by the Company may be required to be made at any time following the date hereof; (iii) any mortgage or other form of secured indebtedness, or any other indebtedness for money borrowed; (iv) any unsecured debentures, notes or installment obligations or other instruments for or relating to any unsecured borrowing of money by the Company, or any letter of credit issued to secure any obligation of a third party other than borrowings less than $50,000 in the aggregate; or (v) any agreement containing any covenant not to compete. (b) Complete and correct copies of all contracts, agreements and other instruments referred to in Schedule 4.15 have heretofore been made available to Parent and MergerCo by the Company. (c) The Company, or, to the knowledge of the Company, any third party, is not in default under, and no event has occurred which with notice or lapse of time, or both, could reasonably be expected to result in a material default under, or violation of, any contract, agreement or instrument identified in subsection (a) above, which defaults and violations in the aggregate would have a Material Adverse Effect. SECTION 4.16. NO VIOLATION, LITIGATION OR REGULATORY ACTION. (a) The Company has complied in all material respects in the conduct of its business with all material federal, state and local laws, except failures to comply which would not have a Material Adverse Effect. The Company has not been notified in writing that it may be a potentially responsible party under or otherwise in material violation of or material noncompliance with the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, the Federal Water Pollution Control Act, 33 U.S.C. Section 1201, the Clean Water Act, 33 U.S.C. Section 1321, the Clean Air Act, 42 U.S.C. Section 7401, and the Toxic Substances Control Act, 15 U.S.C. Section 2601, in each case, as amended from time to time, or any other federal, state or local law, ordinance or regulation dealing with the protection of human health, natural resources and/or the environment, and there are no events or facts known to the Company that indicate that the Company will be a "potentially responsible party", including without limitation, any disposal, release, burial or placement of hazardous or toxic substances, pollutants, contaminants, petroleum or gas products or asbestos containing materials by the Company or on properties owned or leased by the Company. (b) There is no action, suit, proceeding or investigation pending or, to the knowledge of the Company, threatened against, the Company which if adversely determined could reasonably be expected to result in damages in excess of $50,000 that are not covered by insurance, nor has the Company entered into or received any 12 18 consent decree, compliance order or administrative order (whether relating to environmental protection or otherwise); and the Company is not in default (or would not be in default with the giving of notice or lapse of time or both) in respect of any judgment, order, writ, injunction or decree of any court or any Governmental Body which defaults in the aggregate would have a Material Adverse Effect. SECTION 4.17. INSURANCE. Schedule 4.17 is a complete and correct schedule of all currently effective material insurance policies or binders of insurance or programs of self-insurance which relate to the business of the Company (excluding insurance funding Employee Plans which are set forth on Schedule 4.14). The coverage under each such policy and binder is in full force and effect, and no notice of cancellation or nonrenewal with respect to, or disallowance of any claim under, or material increase of premium for, any such policy or binder has been received by the Company, except such notices, disallowances or increases which would in the aggregate not have a Material Adverse Effect. SECTION 4.18. CERTAIN TRANSACTIONS OR ARRANGEMENTS. To the knowledge of the Company, except as described on Schedule 4.18, pursuant to employee benefit arrangements, employment agreements or arrangements or as expressly contemplated by this Agreement, no securityholder, officer or director of the Company (and no Relative of any such securityholder, officer or director) and no Affiliate or associate (as such term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended), of any of the foregoing is presently, directly or indirectly, a party to any agreement, arrangement or understanding with the Company (other than arising out of the employment at will of that securityholder by the Company), including without limitation: (a) any contract, agreement, understanding, commitment or other arrangement providing for the furnishing of services or rental of real or personal property to or from, or otherwise relating to the business or operations of, the Company; (b) any loans or advances to or from the Company or any of the Subsidiaries; (c) any arrangement pursuant to which the Company or an Affiliate thereof may have any obligation or liability whatsoever; and (d) any transaction of a kind which would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the Securities and Exchange Commission, if the Company were subject thereto. SECTION 4.19. CUSTOMER AND SUPPLIER RELATIONSHIPS. To the knowledge of the Company, the relationships of the Company with its material customers and suppliers are, in the aggregate, satisfactory, and the Company is not aware of any fact or circumstance (including the entering into of this Agreement) that would cause any change in such relationships, which change would have a Material Adverse Effect. SECTION 4.20. FINDERS. Neither the Company nor any party acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. SECTION 4.21. DISCLOSURE. All information relating to and concerning the Company contained in this Agreement or in any other certificate, instrument, schedule or other document given by the Company in connection with this Agreement and the Merger is true and correct in all material respects and no material facts necessary to prevent the statements made herein and therein from being misleading have been omitted. SECTION 4.22. BANK ACCOUNTS. Schedule 4.22 contains an accurate and complete list of bank accounts and/or safe deposit boxes maintained by the Company indicating the name and branch of the bank, the account number, the type of account, and the names of all persons authorized to draw thereon or who have access thereto. SECTION 4.23. PAYMENT OF CERTAIN EXPENSES. Except as provided in Section 6.8 hereof, the Company has not paid or agreed to pay on behalf of any shareholder of the Company any costs incurred by any such shareholder in connection with this Agreement or the transactions contemplated hereby. SECTION 4.24. YEAR 2000. The Company's information technology, including, without limitation, computer software, computer firmware, computer hardware (whether general or specific purpose), and other similar or related items of automated, computerized or software system that are used by the Company in the conduct of its business, is designed to be used prior to, during, and after the calendar year 2000, and the information technology used during each such time period will accurately receive, provide and process date/time data (including, without 13 19 limitation, calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, including the years 1999 and 2000, and leap year calculations and will not malfunction, cease to function, or provide invalid or incorrect results as a result of date/time data, to the extent that other information technology, used in combination with the information technology being acquired, properly exchanges date/time data with it ("Year 2000 Compliant"). To the knowledge of the Company, each material supplier, vendor and customer of the Company is Year 2000 Compliant. SECTION 4.25. DISTRIBUTIONS. There has been no declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of the Company except in connection with the payment of taxes. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO As an inducement to the Company to enter into this Agreement and to consummate the transactions contemplated hereby, Parent and MergerCo represent and warrant to the Company as follows: SECTION 5.1. ORGANIZATION. Each of Parent and MergerCo is a corporation duly organized, legally existing and in good standing under the laws of the jurisdiction of its formation and has full corporate power and authority to own or lease and to operate and use its properties and assets and to carry on its business as now conducted. Prior to the date hereof, true and complete copies of the charter and bylaws of Parent and MergerCo have been delivered to the Company. SECTION 5.2. AUTHORITY. (a) Each of Parent and MergerCo has the requisite power and authority to execute and deliver this Agreement and all of the other instruments contemplated hereby to be executed by it, to consummate the transactions contemplated hereby and to comply with the terms, conditions and provisions hereof. The execution, delivery and performance of this Agreement by Parent and MergerCo has been duly authorized and approved by all necessary corporate action on Parent and MergerCo's behalf and do not require any further authorization or consent of Parent or MergerCo or their respective stockholders. This Agreement has been duly executed and delivered by Parent and MergerCo. This Agreement is, and each other instrument of Parent and MergerCo contemplated hereby to be executed by Parent and MergerCo will be, the legal, valid and binding obligation of each of Parent and MergerCo, enforceable against them in accordance with its terms. (b) The execution and delivery by each of Parent and MergerCo of this Agreement or any of the other instruments contemplated hereby, the consummation by each of Parent and MergerCo of the transactions contemplated hereby and the compliance by each of Parent and MergerCo with, or fulfillment by each of them of the terms, conditions and provisions hereof, will not: (i) conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under its charter or by-laws or any note, instrument, agreement, mortgage, lease, license, franchise, Governmental Permit or judgment, order, award or decree to which it is a party, to which any of its properties are subject, or by which it is bound; or (ii) require the approval, consent, authorization or act of, or the making by it of any declaration, filing or registration with, any third Person or any Governmental Body. SECTION 5.3. NO FINDER. Neither Parent nor any party acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. 14 20 SECTION 5.4. ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding or investigation pending, or to the knowledge of Parent, threatened, against Parent or MergerCo which might adversely affect or restrict Parent or MergerCo's ability to consummate the transactions contemplated by this Agreement. SECTION 5.5. CAPITALIZATION. (a) The authorized capital stock of Parent consists of 5,000,000 shares of Preferred Stock, $0.01 par value per share, none of which is outstanding and 60,000,000 shares of Parent Common Stock of which, as of January 14, 1999, 17,543,402 shares were issued and outstanding and 4,046,566 were reserved for issuance upon the exercise of outstanding options, warrants or other rights to subscribe for or purchase from Parent capital stock of Parent or securities convertible into or exchangeable for Parent Common Stock. As of the date hereof, no shares of Parent capital stock have been issued subsequent to January 14, 1999 other than in connection with the exercise of outstanding stock options or warrants. (b) The authorized capital stock of MergerCo consists of 1,000 shares of Common Stock, $.01 par value per share, of which 100 shares are issued and outstanding. (c) The outstanding Parent Common Stock is, and the Parent Common Stock to be issued in the Merger will be, duly and validly authorized and issued, fully paid and non-assessable. SECTION 5.6. FINANCIAL STATEMENTS. Parent has furnished to the Company a balance sheet of Parent at December 31, 1997, and September 30, 1998 (unaudited) and related statements of operations and cash flows for the year ended December 31, 1997 and the nine months ended September 30, 1998 (unaudited). Such financial statements, with the notes thereto, are in accordance with the books and records of Parent, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be stated in the notes to such statements) throughout the periods covered by such statements and present fairly in all material respects the financial condition of Parent and the results of its operations and cash flows for the periods indicated. SECTION 5.7. SEC REPORTS. Parent has delivered to the Company copies of the following reports of Parent (the "SEC Reports") heretofore filed with the SEC: Form 10-Q for the fiscal quarter ended June 30, 1998, Form 10-Q for the fiscal quarter ended September 30, 1998, Form 8-K dated as of November 19, 1998 and Form 8-K dated as of December 15, 1998. Except as disclosed therein, none of the SEC Reports as of their respective dates of filing contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. SECTION 5.8. ABSENCE OF ADVERSE CHANGES. Except as may be disclosed in the SEC Reports, since December 31, 1997 Parent has not suffered any material adverse change in the business, assets, operations or financial condition of Parent and its subsidiaries taken as a whole. SECTION 5.9. GOVERNMENTAL CONSENTS. No consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority is required to be made or obtained by Parent or MergerCo in connection with the execution, of this Agreement. 15 21 ARTICLE VI ADDITIONAL COVENANTS The respective parties hereto covenant and agree to take, or to cause the Company to take, the following actions between the date hereof and the Effective Time: SECTION 6.1. INVESTIGATION OF THE COMPANY BY PARENT. The Company shall afford to the officers, employees and authorized representatives of Parent (including, without limitation, independent public accountants, attorneys, consultants and engineers) reasonable access during normal business hours to the offices, properties, employees and business and financial records (including computer files, retrieval programs and similar documentation) of the Company to the extent Parent shall reasonably deem necessary or desirable and shall furnish to Parent or its authorized representatives, such additional information concerning the Company and its properties, assets, businesses and operations as shall be reasonably requested, including all such information as shall be necessary to enable Parent or its representatives to verify the accuracy of the representations and warranties contained in Article IV, to verify that the covenants of the Company in Section 6.3 have been complied with and to determine whether the conditions set forth in Article VII have been satisfied. Parent covenants that such investigation shall be conducted in such a manner as not to interfere unreasonably with the operations of the Company. No investigation by Parent or its representatives hereunder shall affect the representations and warranties of the Company. SECTION 6.2. CERTAIN AGREEMENTS. Each of the parties hereto shall use its commercially reasonable best efforts to consummate the transactions contemplated by this Agreement. Each party shall promptly notify the others of any action suit or proceeding that shall be instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any transaction contemplated by this Agreement. The Company shall promptly notify Parent of any lawsuit, claim, proceeding or investigation that may be threatened, brought, asserted or commenced after the date hereof against the Company that would have been required to be included on Schedule 4.16, and, in the case of any of the foregoing pending on the date hereof, of any material development with respect thereto. The Company on the one hand, and Parent on the other, shall give prompt notice to the other party of (a) any notice or other communication received by any such party from any Governmental Body or third Person alleging that the consent of such Governmental Body or third Person is or may be required in connection with the transactions contemplated by this Agreement, (b) the occurrence of any event or circumstance which could have a Material Adverse Effect, and of which such party has knowledge or (c) the breach of any material representation, warranty, covenant or other material agreement of any such party. SECTION 6.3. OPERATIONS PRIOR TO THE EFFECTIVE TIME. (a) Subject to Section 6.3(b) hereof, the Company shall operate and carry on its business only in the ordinary course, except as otherwise expressly contemplated by this Agreement. In furtherance and not in limitation of the foregoing, the Company shall use commercially reasonable best efforts to (i) keep and maintain its assets and properties in normal operating condition and repair, (ii) maintain the business organization of the Company intact and (iii) preserve the goodwill of the suppliers, contractors, licensors, employees, customers, distributors and others having business relations with the Company. (b) Except as contemplated by this Agreement, without the express prior written approval of Parent (which shall not be unreasonably withheld) the Company shall not: (i) amend its Articles of Incorporation or Bylaws; (ii) issue or agree to issue capital stock of the Company (by the issuance or granting of options, warrants or rights to purchase any capital stock issued thereby), any securities exchangeable or exercisable for or convertible into such capital stock, or other securities; 16 22 (iii) split, combine or reclassify any shares of capital stock or declare, set aside or pay any dividends (except distributions in an amount equal to the estimated taxes payable by the shareholders of the Company in respect of the net income of the Company for the portion of 1999 during which the Company is an S corporation for federal income tax purposes) or make any other distributions (whether in cash, stock or other property) in respect of such shares; (iv) issue, transfer, sell or deliver any shares of its capital stock (or securities convertible into or exchangeable or exercisable for, with or without additional consideration, such capital stock) or any other interest therein; (v) redeem, purchase or otherwise acquire for any consideration (A) any outstanding shares of its capital stock or securities carrying the right to acquire, or which are convertible into or exchangeable or exercisable for, with or without additional consideration, such stock, (B) any other securities of the Company or (C) any interest in any of the foregoing; (vi) incur any indebtedness for borrowed money, or amend, supplement or otherwise modify any of the terms of any instrument or agreement evidencing indebtedness for borrowed money; (vii) make any acquisition or disposition of stock or assets of any entity; (viii) incur capital expenditures not otherwise provided for in applicable budgets or in connection with the projects referenced on Schedule 4.6, and which expenditures are in excess of $50,000; (ix) merge or consolidate with any corporation or other entity; (x) enter into any employment or similar contract with, or materially increase the compensation payable to, any officer or employee; (xi) alter in any respect its practices and policies relating to the payment and collection, as the case may be, of accounts payable and accounts receivable; (xii) except as contemplated by or described in this Agreement, adopt, amend in any material respect or terminate any Employee Plan, severance plan or collective bargaining agreement or make awards or distributions under any Employee Plan, except awards or distributions to any participant or employee in the ordinary course of business consistent with past practices; (xiii) create, assume or suffer to be incurred any Encumbrance of any kind on any of its properties or assets other than (A) Encumbrances in the ordinary course of business consistent with past practices, as long as the creation, assumption or sufferance thereof does not interfere with, hinder or delay the transactions contemplated hereby and (B) Permitted Encumbrances; (xiv) amend, supplement or modify any contract set forth on Schedule 4.15 or relinquish any material right or privilege of the Company, except, in the case of any contract set forth on Schedule 4.15, for any such amendments, supplements or modifications which are not materially adverse to the Company; or (xv) agree, commit or resolve to do or authorize any of the foregoing. (c) Prior to the Closing, the Company shall: (i) promptly comply with all filing requirements which federal or state law may impose on the Company with respect to the transactions contemplated hereby; and 17 23 (ii) use its reasonable efforts to obtain any consent, authorization or approval of, or exemption by, any Governmental Body or other third Person, including without limitation, landlords and lenders and those persons (other than the Company) who are parties to the agreements described on Schedule 4.4 hereto, required to be obtained or made by it in connection with the transactions contemplated hereby. SECTION 6.4. NO PUBLIC ANNOUNCEMENT. Prior to the Effective Time, no party hereto shall make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that such party shall be so obligated by law, in which case the other party shall be so advised, and Parent and the Company shall use their commercially reasonable best efforts to cause a mutually agreeable release or announcement to be issued. On the date hereof and at the Effective Time, the parties shall issue a joint press release which shall be reasonably acceptable to Parent and the Company. SECTION 6.5. GOVERNMENTAL FILINGS; CONSENTS. Parent and the Company shall cooperate with each other in filing any necessary applications, reports or other documents with any federal or state agencies, authorities or bodies (domestic or foreign) having jurisdiction with respect to this Agreement and the transactions contemplated hereby, and in seeking necessary consultation with and prompt favorable action by, including required consents of, any such agencies, authorities or bodies. SECTION 6.6. EMPLOYEE BENEFITS. From and after the Closing, Parent and the Company shall perform all obligations pursuant to Employee Plans and policies that have accrued or otherwise become due on or before the Closing; provided, however, that nothing herein shall require the Parent or the Company to continue sponsoring or contributing to any such Employee Plan or policy. SECTION 6.7. AFFILIATES OF THE COMPANY AND PARENT As soon as practicable, the Company and Parent shall each deliver to the other a letter pursuant to Staff Accounting Bulletins 65 and 76 and Accounting Series Releases 130 and 135 (the "Affiliate Letter") identifying all persons who may be deemed affiliates of the Company or Parent, respectively, for purposes of the foregoing, including, without limitation, all directors and executive officers of the Company or Parent as of the date of the Affiliate Letter. Each of the Company and Parent shall use its best efforts to obtain as soon as practicable from each person listed on the respective Affiliate Letter and in any event prior to the Closing Date, an agreement not to sell shares of Company Common Stock or Parent Common Stock in excess of an amount which would contravene the provisions of the foregoing until combined results of operations covering at least thirty (30) days of combined operations are made public. SECTION 6.8. FUNDING OF CERTAIN OBLIGATIONS At the Effective Time, Parent shall pay or cause the Company to pay the fees, expenses and disbursements of the Company's counsel and accountants incurred by the Company in connection with the negotiation and preparation of this Agreement and its performance and compliance with the terms and conditions contained herein; provided that the aggregate total of such fees, expenses and disbursements as set forth on Schedule 6.8 and any other expenses of the Company incurred in connection with the transactions contemplated hereby shall not exceed $50,000, and any amounts in excess of such amounts shall be borne by parties that are shareholders of the Company immediately prior to the Effective Time. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO The obligations of Parent and MergerCo to consummate the transactions contemplated by this Agreement shall, at the option of Parent and MergerCo, be subject to the satisfaction, on or prior to the Closing Date, of the following conditions: 18 24 SECTION 7.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There shall have been no material breach by the Company in the performance of any of its covenants, agreements and obligations herein; none of the representations and warranties contained or referred to in Article IV hereof shall fail to be true and correct on the date hereof and at the Effective Time as though made at the Effective Time, except for (a) representations and warranties that speak as of a specific date or time other than the Effective Time (which need only be true and correct as of such date or time), (b) representations and warranties which are not qualified by Material Adverse Effect or otherwise by material adversity (which need be true and correct except for such inaccuracies as in the aggregate (together with the inaccuracies referred to in the following clause (c)) would not have a Material Adverse Effect), (c) representations and warranties which are qualified by Material Adverse Effect or otherwise by material adversity shall also be true and correct without regard to such qualification except for such inaccuracies as in the aggregate (together with the inaccuracies referred to in the preceding clause (b)) would not have a Material Adverse Effect, (d) the representations and warranties set forth in Section 4.2 shall be true and correct on the date hereof and at the Effective Time and (e) changes therein specifically resulting from any transaction expressly consented to in writing by Parent; and there shall have been delivered to Parent and MergerCo a certificate to such effect, dated the Effective Time and signed by the President or other senior executive officer of the Company. SECTION 7.2. RESIGNATIONS OF DIRECTORS. Prior to the Closing, Parent shall notify the Company of those directors of the Company from whom it will require resignations. The Company shall have furnished Parent with such signed resignations, effective as of the Closing. SECTION 7.3. LITIGATION. As of the Effective Time, there shall be no injunction, restraining order or decree of any nature of any court or other Governmental Body of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions or other material obligations of the parties hereto as contemplated hereby. SECTION 7.4. NECESSARY APPROVALS AND CONSENTS. The Company shall have delivered to Parent such evidence as Parent may reasonably request of the receipt of all consents, approvals and actions of any third Person or Governmental Body specified in Schedule 4.4. SECTION 7.5. CORPORATE ACTION. The Board of Directors of the Company shall have taken all action necessary to approve the transactions contemplated by this Agreement, and the Company shall have furnished Parent with certified copies of resolutions adopted by the Board of Directors of the Company, in form and substance reasonably satisfactory to counsel for Parent, in connection with such transactions. SECTION 7.6. ADOPTION OF AGREEMENT. This Agreement shall have been adopted by the affirmative vote of the shareholders of the Company by the requisite vote in accordance with applicable law. SECTION 7.7. POOLING OF INTERESTS. Parent shall have been advised that PricewaterhouseCoopers LLP concurs with management's assessment that the Merger qualifies as a "pooling of interests" for accounting purposes. 19 25 SECTION 7.8. NONCOMPETITION AGREEMENTS. Each of Brad J. Hammond and Mike Carroll shall have entered into noncompetition agreements pursuant to which he shall agree not to engage, directly or indirectly, whether as a partner, consultant, officer, director, employee, greater-than-five-percent (5%) shareholder, sales representative, proprietor or otherwise in any business activities in competition with the Company for a term of two years after the Closing Date, such noncompetition agreement to be in form and substance reasonably satisfactory to Parent. SECTION 7.9. WITHHOLDING TAXES. Each of Tom Cudihy, Mike Carroll, Harrison Mullin and Brian Zimmerman shall have delivered to Parent funds sufficient to pay the withholding taxes (including, without limitation, federal and state income taxes and FICA taxes) imposed on the issuance to such individuals of Company Common Stock during 1998, in the amount reasonably determined by Parent. SECTION 7.10. OPINION. Kilpatrick Stockton LLP shall have delivered to the Parent a legal opinion, dated as of the Effective Time, in form and substance satisfactory to Parent and its counsel. ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY The obligations of the Company to consummate the transactions contemplated by this Agreement shall, at its option, be subject to the satisfaction at or prior to the Effective Time, of the following conditions: SECTION 8.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There shall have been no material breach by Parent or MergerCo in the performance of any of their covenants and agreements herein; each of the representations and warranties of Parent and MergerCo contained or referred to in this Agreement shall be true and correct at the Effective Time as though made at the Effective Time, except for (a) representations and warranties that speak as of a specific date or time other than the Effective Time (which need only be true and correct as of such date or time), (b) representations and warranties which are not qualified by material adverse effect or otherwise by material adversity (which need be true and correct except for such inaccuracies as in the aggregate (together with the inaccuracies referred to in the following clause (c)) would not have a material adverse effect) and (c) representations and warranties which are qualified by material adverse effect or otherwise by material adversity shall also be true and correct without regard to such qualification except for such inaccuracies as in the aggregate (together with the inaccuracies referred to in the preceding clause (b)) would not have a material adverse effect; and there shall have been delivered to the Company a certificate to such effect, dated the Effective Time and signed by the Chief Executive Officer or other senior executive officer of Parent. SECTION 8.2. LITIGATION. As of the Effective Time, there shall be no injunction, restraining order or decree of any nature of any court or other Governmental Body of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions or other material obligations of the parties hereto as contemplated hereby. ARTICLE IX TERMINATION SECTION 9.1. TERMINATION. Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Effective Time: (a) by the mutual consent of Parent and the Company; (b) by Parent in the event that any condition set forth in Article VII shall not be satisfied and shall not be reasonably capable of being remedied at or prior to March 31, 1999, (c) by the Company in the event that any condition set forth in Article VIII shall not be satisfied and shall not be reasonably capable of being remedied at or prior to March 31, 1999; and (d) by Parent or the Company if the Effective Time shall not have occurred on or 20 26 before March 31, 1999 (or, if Parent and the Company shall have agreed to a later date pursuant to Section 2.2, on or before any such later date); provided, however, that no party may terminate this Agreement pursuant to clause (b), (c) or (d) if the failure of any condition in Article VII or Article VIII to be satisfied or the failure of the Effective Time to occur on or before March 31, 1999 (or, if Parent and the Company shall have agreed to a later date pursuant to Section 2.2, on or before any such later date), results from the willful and material breach by such party of any covenant of this Agreement. SECTION 9.2. NO LIABILITY UPON TERMINATION. In the event that this Agreement shall be terminated pursuant to this Article IX, all obligations of the parties under this Agreement (other than under this Section 9.2) shall be terminated without liability or penalty on the part of any party or its officers or directors to any other party, other than as may result from any willful and material breach by a party of this Agreement. ARTICLE X SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION PROVISIONS SECTION 10.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of each of the parties contained herein shall survive the Merger regardless of any investigation by the other parties or their agents for the period of the Escrow Term; provided, however, that liability on the part of any shareholder of the Company for any misrepresentation or breach of warranty hereunder shall be limited to such shareholder's pro rata interest in the Escrow, except for intentional or reckless misrepresentations which shall not be so limited and liability for which shall survive the Escrow Term. SECTION 10.2. INDEMNIFICATION. In view of the fact that upon the Effective Time the Company will become a wholly-owned subsidiary of Parent and in order to provide protection for Parent from and after the Closing, the Escrow shall be established on behalf of those persons who immediately prior to the Closing were shareholders of record of the Company as set forth in Schedule 4.2 (the "Shareholder Group"), which Escrow shall, subject to and to the extent provided in Article XI, indemnify and hold Parent and the Company harmless in respect of any losses or liabilities (including without limitation legal and other out-of-pocket expenses for investigating or defending any actions or threatened actions) incurred by Parent or the Company in connection with any misrepresentation or breach of any representation, warranty, covenant or agreement made by the Company in this Agreement or in any certificate, instrument, schedule or document given by the Company in connection with this Agreement (all of which are herein collectively referred to as "Deficiencies" and individually as a "Deficiency"); provided, however, that indemnity shall be due under this Section 10.2 only to the extent that the actual loss suffered by Parent or the Company attributable to such Deficiencies exceeds a cumulative aggregate amount of $100,000 (the "Deductible"), Parent and the Company shall be entitled to recover damages for breach of any representation or warranty of the Company under this Agreement after the Closing only pursuant to the escrow arrangements set forth in Article XI, except for intentional or reckless misrepresentations as set forth in Section 10.1 hereof. SECTION 10.3. APPOINTMENT OF REPRESENTATIVE. Approval of this Agreement by a majority of the outstanding Shares shall constitute appointment by the Shareholder Group of Brad J. Hammond as the representative (the "Representative") of the Shareholder Group with respect to the Escrow. The actions of the holders of a majority of the shares of Parent Common Stock contributed to the Escrow shall be binding upon all members of the Shareholder Group. The Representative shall in no event be liable to any of the Shareholder Group or to Parent, MergerCo or the Company for any action taken in good faith by the Representative in the scope of performing his role hereunder. SECTION 10.4. CONTROL OF ACTIONS AND PROCEEDINGS. Parent shall be entitled to fully control the defense and settlement of any claim by a third party against the Company even though such claim is or may be covered by the indemnification provisions hereof; provided, however, that Parent shall not settle or compromise any third party claim which is the subject of a claim against the Escrow without the written consent of the 21 27 Representative, which consent will not be unreasonably withheld; and provided further that Parent may nevertheless settle or compromise any such third party claim without the Representative's written consent if the failure to so settle or compromise in a timely manner will in the reasonable judgment of Parent materially and adversely affect Parent or the Company (any such settlement shall not prejudice the rights of any party to maintain that such settlement should not result in a claim for indemnification in the amount of the settlement or at all). ARTICLE XI ESCROW ARRANGEMENTS SECTION 11.1. ESCROW TERM. The Parent agrees to hold the Escrow of Parent Common Stock (the "Escrow Stock") until May 15, 1999 (the "Escrow Term"), and, subject to the further provisions of this Article XI, at the expiration of the Escrow Term (subject to any pending claims), any Escrow Stock remaining in the Escrow shall be delivered by Parent to such shareholders in accordance with such shareholders' respective interests as set forth on Schedule 3.2. SECTION 11.2. NOTICE OF CLAIMS. (a) If, during the Escrow Term, Parent, MergerCo or the Company shall deliver to the Representative written notice of a Deficiency against which Parent, MergerCo or the Company are entitled to indemnification under Article X of this Agreement and setting forth the applicable information called for by Section 11.3(b) ("Notice of Claims"), Parent shall, notwithstanding the expiration of the Escrow Term, continue to hold a number of shares of Escrow Stock in the Escrow equal to the aggregate amount of Deficiencies referred to in such Notice of Claims and any other unresolved Notice or Notices of Claims (or if the amount referred to in such Notice(s) of Claims is greater than the amount held in the Escrow, then Parent shall continue to hold the entire amount in the Escrow) until such claims are resolved pursuant to Section 11.4. (b) Any Notice of Claims shall contain the following information to the extent it is reasonably available to Parent, MergerCo or the Company: (i) The amount of the alleged loss or liability against which Parent, MergerCo or the Company is indemnified; (ii) A brief description of the circumstances giving rise to the alleged loss or liability; and (iii) The amount of unused Deductible. (c) The Parent shall not remove Escrow Stock from the Escrow pursuant to a Notice of Claims until such Notice of Claims has been resolved in accordance with Section 11.4. SECTION 11.3. RESOLUTION OF NOTICE OF CLAIMS AND TRANSFER OF ESCROW STOCK. Notice of Claims sent by Parent, MergerCo or the Company pursuant to Section 11.2 shall be resolved as follows: (a) Uncontested Claims: In the event that the Representative does not contest a Notice of Claims in writing to Parent within 30 days of the mailing of said Notice of Claims as set forth in Section 11.2(a), Parent shall remove from the Escrow a number of shares of Escrow Stock with a value (determined pursuant to Section 11.3(c)) equal to the amount specified in the Notice of Claims (less any unused Deductible as specified in such Notice of Claims) and notify the Representative of such removal; (b) Contested Claims: In the event that the Representative contests the Notice of Claims in writing to Parent within such 30-day period, Parent shall continue to hold Escrow Stock in the Escrow in an amount sufficient 22 28 to cover such claims (notwithstanding the expiration of the Escrow Term) until (i) a settlement agreement is executed by Parent, MergerCo, the Company and the Representative setting forth a resolution of the Notice of Claims or (ii) a final judgment is entered by a court of competent jurisdiction as to the disposition of the disputed amount held in the Escrow. (c) Determination of Amount of Claims. Any amount owed to Parent, MergerCo or the Company hereunder determined pursuant to Section 11.3(a) or (b) shall be immediately available to Parent, MergerCo and the Company at the option of Parent out of Escrow Stock then held by Parent on a per share value equal to the average closing price per share of Parent Common Stock on the principal exchange upon which the shares are listed for the 10 trading days prior to the date hereof. Parent is authorized to sell Escrow Stock in the market in order to satisfy any obligation owing hereunder. In the event of any such sale, the Representative shall execute and deliver to Parent such additional stock assignments, duly executed and with signature guaranteed, and such other documents as may reasonably be necessary to effect a sale of all or part of Escrow Stock. (d) Claims to be Paid Pro Rata. Unless otherwise directed, the use shares of Escrow Stock for indemnification hereunder shall be in proportion to the respective interests therein among the registered holders of Escrow Stock set forth in Schedule 3.2. (e) No Election of Remedies. The Representative acknowledges and agrees that Parent, MergerCo and the Company may institute claims against Escrow Stock and in satisfaction thereof may retake shares of Escrow Stock without making any claims directly against the Company and without rescinding or attempting to rescind the transactions consummated pursuant to this Agreement. The assertion of any single claim for indemnification hereunder shall not bar Parent, MergerCo or the Company from asserting other claims for indemnification hereunder. It is hereby agreed that Parent, MergerCo and the Company need not exhaust any other remedies that may be available to them. SECTION 11.4. RIGHTS RELATING TO ESCROW STOCK. The parties hereto agree that so long as any Escrow Stock is held by Parent in the Escrow hereunder all share dividends and stock split shares with respect to such Escrow Stock shall be delivered to Parent and shall be deemed Escrow Stock hereunder, but the registered holders of Escrow Stock shall be entitled to vote the shares evidenced thereby and to receive dividends (other than share dividends) on such shares of Escrow Stock. ARTICLE XII GENERAL PROVISIONS SECTION 12.1. NOTICES. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed to have been duly given or made (a) five business days after being sent by registered or certified mail, return receipt requested, (b) upon delivery, if hand delivered, (c) one business day after being sent by prepaid overnight carrier with guaranteed delivery, with a record of receipt, or (d) upon transmission with confirmed delivery if sent by cable, telegram, facsimile or telecopy, to the parties at the following addresses (or at such other addresses as shall be specified by the parties by like notice): (a) if to Parent: broadcast.com inc. 2914 Taylor Street Dallas, Texas 75226 Attn.: Todd Wagner Telecopy: 214.748.6657 23 29 with copies to: Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166 Attn.: Sean P. Griffiths Telecopy: 212.351.4035 (b) if to the Company: Net Roadshow, Inc. 580 Armour Circle Atlanta, Georgia 30324 Attn: Brad J. Hammond Telecopy: 404.873.0299 with copies to: Kilpatrick Stockton, LLP 1110 Peachtree Street, Suite 2800 Atlanta, Georgia 30309 Attn: David A. Stockton Telecopy: 404.815.6555 SECTION 12.2. PARTIAL INVALIDITY. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in the case that any provision contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable. SECTION 12.3. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties and delivered to each of Parent and the Company. SECTION 12.4. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to principles of conflicts of laws. SECTION 12.5. ASSIGNMENT; SUCCESSORS AND ASSIGNS. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors or assigns, heirs, legatees, distributees, executors, administrators and guardians. Nothing in this Agreement, expressed or implied, is intended or shall be construed upon any Person (other than the parties hereto and the successors and assigns permitted by this Section 12.5) any right, remedy or claim under or by reason of this Agreement. SECTION 12.6. TITLES AND HEADINGS. Titles and headings to sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. SECTION 12.7. SCHEDULES AND EXHIBITS. The schedules and exhibits referred to in this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. 24 30 SECTION 12.8. ENTIRE AGREEMENT; AMENDMENTS. This Agreement including the schedules and exhibits, and the letter agreement regarding negotiations dated January 15, 1999, contain the entire understanding of the parties hereto with regard to the subject matter contained herein. The parties hereto, by mutual agreement in writing, may amend, modify and supplement this Agreement. SECTION 12.9. WAIVERS. Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. SECTION 12.10. SPECIFIC PERFORMANCE. The parties acknowledge that irreparable damage would result if this Agreement were not specifically enforced, and they therefore consent that the rights and obligations of the parties under this Agreement may be enforced by a decree of specific performance issued by a court of competent jurisdiction. Such a remedy shall, however, not be exclusive, and shall be in addition to any other remedies which any party may have under this Agreement or otherwise. [Signatures on next page] 25 31 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. NET ROADSHOW, INC., a Georgia corporation BROADCAST.COM INC., a Delaware corporation By: /s/ Brad J. Hammond ------------------------------------ Name: Brad J. Hammond By: /s/ Todd R. Wagner Title: President ------------------------------ Name: Todd R. Wagner Title: Chief Executive Officer NRS ACQUISITION, INC., a Delaware corporation By: /s/ Todd R. Wagner ------------------------------- Name: Todd R. Wagner Title: President 32 EXHIBIT A CERTIFICATE OF MERGER OF NRS ACQUISITION, INC. (A DELAWARE CORPORATION) WITH AND INTO NET ROADSHOW, INC. (A GEORGIA CORPORATION) NRS Acquisition, Inc., a Delaware corporation and the non-surviving corporation in the merger ("NRS"), and Net Roadshow, Inc., a Georgia corporation and the surviving corporation in the merger ("Net Roadshow"), hereby certify that: I. The name and state of incorporation of each constituent corporation which is merging are: (a) NRS Acquisition, Inc., a business corporation under the laws of the State of Delaware; and (b) Net Roadshow, Inc., a business corporation under the laws of the State of Georgia. II. The surviving corporation in the merger is Net Roadshow, Inc., a Georgia corporation, which will continue its existence as the surviving corporation. III. The Agreement and Plan of Reorganization (the "Agreement") has been approved, adopted, certified, executed and acknowledged by each of the aforesaid constituent corporations in accordance with the provisions of the Georgia Business Corporation Code (the "GBCC") and of the General Corporation Law of the State of Delaware (the "DGCL"). IV. Approval of the merger by the shareholders of NRS was obtained pursuant to Section 251 of the DGCL. V. The articles of incorporation of Net Roadshow, in effect immediately prior to the effective time of the merger shall be the articles of incorporation of the surviving corporation; and said articles of incorporation shall continue to be the articles of incorporation of the surviving corporation until amended and changed in accordance with the provisions of the GBCC. 33 VI. The executed Agreement is on file at the principal place of business of Net Roadshow, which is: 580 Armour Circle, Atlanta, Georgia 30324. 1 VII. A copy of the Agreement will be furnished by Net Roadshow, on request and without cost, to any party to the Agreement. VIII. The surviving corporation hereby undertakes to make the request for publication of a notice of filing of this Certificate of Merger and payment therefor in accordance with Sections 14-2-1006.1 and 14-2-1105.1(b) of the GBCC. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Merger as of this ____ day of _____________, 1999. NET ROADSHOW, INC. a Georgia corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES Name State of Incorporation ---- ---------------------- Simple Networks Communications, Inc. California Net Roadshow, Inc. Georgia AudioNet Corporation Delaware EX-23.1 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-70331) of our report dated January 27, 1999, except as to Notes 3 and 11, which are as of March 15, 1999, appearing on page F-2 of this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page S-1 of such Annual Report on Form 10-K. PricewaterhouseCoopers LLP Dallas, Texas March 30, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 49,680 0 4,483 239 0 54,353 11,622 4,946 62,079 4,008 0 0 0 243 57,828 62,079 22,372 22,372 0 40,542 0 0 (1,726) (16,444) 0 (16,444) 0 0 0 (16,444) (0.52) (0.52)
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